Sinking Funds Explained

Sinking funds are a way for you to save money every single month for a purchase or expense that you know will be occuring in the future. By using a sinking fund, you already have the money set aside for a large purchase that you are anticipating. Therefore, the purchase or expense isn’t a pain in your budget because you already have the money set aside.

Once you create them, sinking funds can be used in many ways. One of the most common ways is to calculate the total cost of an expected future purchase, as well as the number of months before you will make the purchase. Once you have these totals calculated, you can take the total cost and divide it by the number of months until you plan to make the purchase. By the time you need to make the purchase, you will have the amount saved, and it won’t become a burden to your budget!

The sinking funds you create will be fully based upon your lifestyle! The sinking funds that work for me, might not necessarily work for you (and vice versa)! Some common examples of popular sinking funds are:

Christmas

Christmas (or any holiday) is a great reason to create a sinking fund. Although you may be able to cash-flow Christmas in December, will it affect your other financial goals? Putting the same amount in your Christmas sinking fund each month will help you plan for the larger expense come December!

For example; if you plan to spend $1200.00 on gifts, you could put $100.00 in your fund each month of the year. Or, you could put in $200.00 per month for six months of the year.

A New Roof

I’m not a home owner (yet!), so this one doesn’t apply to me. However, if you are a home owner, this is such an important sinking fund to create. As we know, a new roof is not a small purchase. A new roof is often upwards of $10,000, and this is not something to easily cash flow all at once.

For example; you received an estimate of $10,000 for a new roof. You also know that your current roof is expected to last for approximately fifteen years. It would be a wise decision to break that down into:

$10,000 / 180 months (fifteen years) = $55.56 per month

This is a much easier number to deal with per month in comparison to $10,000 all at once!

Purchasing a New Home

Saving up enough money for a downpayment on a new home is no easy job. However, it’s incredibly worth it if you are able to do so. A customary amount to put down on a new home is 20%; depending on the total price of the home, can be a lot.

For this type of sinking fund, it’s advised that you decide how much you will want to spend as a whole on your house. Once you have the total cost, figure out what 20% equals to.

For example, if you’re looking at a mortgage of $250,000, 20% equals out to be $50,000. If you’re looking to purchase your new home in five years (60 months), you should be saving approximately $833.33 per month.

A New Vehicle

It is often hard to get a total cost on a vehicle if you’re not actively looking. A dealership can give you a quote, but prices often change. In the case of a vehicle, it’s better to have more saved than not enough. Any extra money can be moved to a vehicle maintenence fund. It can also be moved into a different sinking fund.

Why Should You Add Sinking Funds into your Budget?

Many people choose to use sinking funds for purchases that are a larger cost than normal for them. They’re also used for purchases that could not easily be cash flowed in a month. However, it is a good practice to use sinking funds for all different things! Creating sinking funds for purchases that may not be ‘every day’ purchases, but aren’t large purchases is still a good idea so that your monthly budget isn’t blown out of the water. Creating sinking funds is ensuring that you’re still able to meet your other monthly financial goals.

Try sitting down by yourself (or with your partner if you have one) and think about any larger purchases that you could possibly be making in the next few months or years. Next, take the total of the purchases and divide the total by the number of months before you plan to make the purchase.

Could a sinking fund help you stay on track with your finances while saving for your purchases at the same time?

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3 Comments

  1. cate
    April 29, 2019 / 6:07 pm

    i’m trying to be better at saving but rent takes half of my salary every month !

    Cate ღ 35mm in Style

    • Kate
      Author
      May 9, 2019 / 11:47 am

      This definitely makes it hard! Have you considered taking on a part time job, or turning one of your passions into a source of income to help? 🙂

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