Putting aside money for future use is an excellent way to ensure you have the funds necessary when expenses arise. A sinking fund is one such method that allows you to set aside money over time and plan for future costs. If you want to know more about this method, how it works and where and how to save into one, keep reading below.
What is a sinking fund?
A sinking fund can help you get ahead financially. It’s a financial tool used to save money over time. Used to prepare for future expenditures, like the expense of Christmas.
You set aside some money every payday to cover the cost of your upcoming expenses. What you save will provide a nice boost whenever it is time to make payments.
How does a sinking fund work?
There are lots of ways to create sinking funds, including using cash envelopes or saving pots within different bank accounts.
First, you need to plan what you want a sinking fund or funds for.
Sinking funds can be used for many things. They can be for additional regular or irregular items on your budget, for example, Christmas, birthdays, holidays, car maintenance, car insurance, car tax, house repairs, etc.
Once you have listed the sinking funds you need, next, you will need to decide how much money each sinking fund requires.
For each sinking fund, the amount is divided by the number of paydays you have until the money is needed.
For example, if Christmas costs you £1,000 a year, and you are paid weekly, divide £1,000 by 52 to get £19.23. You would then save £19.23 every week into your Christmas sinking fund. If you start saving in January, you will have enough money in the pot by Christmas.
The benefits of sinking funds
The benefits of sinking fundsA sinking fund is a good way to prepare for any upcoming expenses. It’s easy to see how much you have saved towards your goal and adjust your plan accordingly when necessary.
Having a sinking fund means you’re budgeting ahead and can have the money there when it’s needed.
This can help you to avoid debt or increase your debt further.
Having the money to pay for annual plans as opposed to monthly plans is also a strong positive. Not only will it save you time but you can save money too by paying off specific expenses in advance. For example, paying car insurance annually will cost less than monthly payments.
What kind of sinking funds do I need?
If you don’t know what a sinking fund is, here are the three main types of sinking funds to look into:
Long-term expenses
Long-term expenses are just that – long-term. Things like a house deposit, renovating your home, getting yourself a new car or even planning a wedding which can take some time and money.
Regular annual expenses
Expenses that you have every year and you know will come up. Some popular regular expenses you might be aware of include Christmas presents, car-related costs, and birthdays.
Miscellaneous expenses
These may be optional but could include things like a new haircut, buying clothes, school trips etc.
Concluding thoughts about a sinking fund
Sinking funds are a great method for saving money with many benefits.
The technique lets you divide your money into different pots, or funds, to be used when needed.
You can save money into your sinking funds every time you receive an income.
By using sinking funds you can save up for large expenses while still having enough saved for daily life or emergencies that may crop up.