A sinking fund is an account where each month you would contribute a bit of money that you are trying to save for later on. Essentially, you’re making it a lot easier to cover a cost for a large purchase down the road. You save a little bit of money over a previously determined period of time to make a large purchase instead of trying to cashflow a large purchase all at once – it makes it easier on you and your budget. For a more indepth look into what sinking funds are, check out another one of my posts here.
Creating and Using
The first way to use a sinking fund is to save the same amount of money each month until you have enough to purchase the item (or expense) you have been saving for.
*For example, lets say you want to purchase your first ‘new to you’ vehicle. Your plan is to save $300 per month. You don’t currently have a car in mind, you’re just trying to save for when one that you like becomes available. You would continuously save the $300 per month until you’re able to purchase one that meets your needs.
The second way to use a sinking fund is to figure out the cost of the item you will be purchasing, and divide the cost by the amount of months until you purchase the item. This will give you the amount you will have to be saving each month. By the time the day comes that you will have to be making this purchase, you will have the money already saved.
*For example, if you know that you will need a new roof that will cost you $20,o00 in 10 months from now, after doing the math ($20,000 / 10 months) you know that you should be setting aside $2000 per month in order to fund your roof purchase.
Examples of Sinking Funds to Start
A sinking fund is unique to each person, as each person will have different wants and needs. A sinking fund that works for one person may not benefit the next. You have to look at your own personal situation and create the funds that work for you.
However, here are some examples of sinking funds that work well for many people, and that may also benefit you:
- Christmas fund
- New vehicle
- House fund
- New roof
- New water heater
- Any new appliance for home owners
- Vacation fund
Where do you keep them?
When it comes to bank accounts, everyone has a different method that works for you. Some banks will only let you open one chequing and one savings account; while other banks will allow you to open multiple of each.
One way to organize your sinking funds is to open one large savings account. Along with your one account, you would also have a spread sheet. This spread sheet would differentiate how much money is allocated to each fund.
Another way you can organize your sinking funds is to have a separate savings account for each fund. This is my method of choice. Reach out to your bank or credit union and see if this is an option if you believe this is the best method for you. I choose to have my sinking funds in a bank separate from my regular bank. I chose to go with Tangerine Banking; everything is online, and they give me the option to create multiple savings accounts that can be used as my sinking funds. Tangerine banking also allows me to change the name of each account so I can easily tell each account apart.
If you would like to open your own Tangerine Banking account for your sinking funds, if you use my Orange Code (49343279S1) and deposit $250 into your first sinking fund or savings account, you will get an extra $50!
As you can tell, I love sinking funds! I’m a huge planner, and sinking funds are a great way to put a financial plan in place for the future! Sinking funds turn what could have been a financial emergency into a planned expectation that you are fully prepared for!
Let me know in the comments below what kinds of sinking funds you keep in your budget!