I don’t know about you, but there’s nothing that beats the excitement of booking a new vacation. Even though it may be months away, the anticipation hits you right when that payment is submitted. The thing is, the moment it hits your credit card bill, the excitement quickly turns to anxiety from seeing your balance suddenly shoot up by thousands of dollars!
Today, I introduce to you the sinking fund. This handy little personal finance technique is designed to lower that anxiety around big bills and make you much more confident in splurging for things like big vacations or new phones! Keep reading to see how easy it is to start a sinking fund (or two or three!).
What are Sinking Funds?
Sinking Funds are a place to “hold” your money for a specific purpose. It takes advantage of the “out of sight out of mind” mentality. By making monthly contributions to reach a set goal, you can plan ahead for big purchases way in advance and never worry about not having the money when you need it.
You can have multiple sinking funds in separate accounts or in one account if you’re good at keeping track of each goal!
What are Sinking Funds Good For?
These are great tools for short-term or medium-term goals which are the things you’re probably used to stashing money in your checking account for or even carrying a balance on your credit card.
A shortlist of great sinking funds:
- Vacation
- New phone, laptop, etc.
- Car
- Christmas gifts
- Subscriptions billed yearly (i.e. cloud storage)
- Insurance
- Wedding
- Annual Donations
- Moving costs (i.e. furniture, moving truck)
How Do I Set One Up?
Before you even transfer a cent (or two 😉), set a target amount for how much you want in your sinking fund and a target date for when you want to save it by!
After that, you can divide the target amount by # of weeks/months until the target date and that will tell you how much you need to save each week/month to reach your goal!
Once you’ve done that important step, I would recommend opening up a totally new savings account for your sinking fund. It’s usually easy to do this with your bank or you can utilize online banks like Ally that have hassle-free ways to create new sinking funds.
Lastly, plan to contribute to your sinking funds each month. Bonus points if you automate these payments! This will prevent you from forgetting or abandoning your goal.
Want More?
I hope this little guide to sinking funds inspired you to start saving for those small goals! If you liked this article and want more personal finance content straight to your insta feed, follow me @twocentswithjulia!