What is a Sinking Fund and Why Do You Need One?

Small piggy bank with "Sinking fund" written on it
Have you been budgeting and making amazing money plans that seem to be ruined by yet another unexpected expense? Or did Christmas come earlier than expected and caused you to rack up new credit card debt ? Does every large expense feel like an emergency? The #1 culprit for this budgeting flaw is the lack of a sinking fund.

What is a sinking fund?

Its money set aside for an intended or specific expense that will happen in the near future. Creating this fund allows you to contribute smaller amounts of money to soften the hardship of paying out a large amount.

How do I set one up?

For example, if you start saving for Christmas in January, you have approximately 11 months to save – so you have all your shopping done a month ahead. Now, let’s say on average you spend about $1,200 on Christmas which includes gifts, wrapping paper, decorations, and cards. I’m gonna divide the $1,200 needed by 11 months which will give me my monthly contribution required to fully fund that fund by the goal date of Nov 30th. $1,200 / 11 = $109 By contributing $109 every single month for 11 months, by November 30th I will have a fully funded sinking fund for Christmas and I will not need to go into debt or blow a months budget to fund this holiday.

Why do I need one?

A sinking fund is essential because it allows you to forecast future large purchases and protects your monthly budget. It also helps you keep your goals intact because by having money set aside for things you know you will be spending on, you will not need to delay your goal to fund a large expense. Sinking Fund Ideas
  • Christmas / Holidays
  • Car Maintenance
  • Car Insurance Annual or Bi Annual Payments
  • Vacation
  • Travel
  • New Car
  • Home Maintenance
  • Gifts throughout the Year
Implement your sinking fund ASAP and store each fund in a High Yield Savings Account so your money accumulates the most interest it possibly can! I recommend Ally Bank or Capital One to create bucketsfor each sinking fund. You can create a goal for each fund and connect them to your checking account for easy transfers.
Picture of Valery Vargas

Valery Vargas

Valery is a 30 something millennial, Latina, entrepreneur at heart, first time mama, real estate investor, bookworm, board game enthusiast, and dreamer.

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