Are Sinking Funds in Your Arsenal?

Our Story

If you’re like me, you tend to think of whatever is coming up next. It’s August, so I’m starting to think about kids going back to school and wrapping up the summer. In another month or so, it’ll start getting cold and thoughts of winter clothes and whether I can fit last year’s wardrobe will come to mind. But, by that time, it’s already getting cold and Fall/Winter sales are already starting. Problem is, I wasn’t prepared. The season snuck up on me. …or did it?

About Sinking Funds

A sinking fund is “a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset,” according to Oxford Languages Dictionary. It’s basically a business tool of setting aside smaller amounts of money over time so that there is a softer financial hit when comes time to repay that borrowed money. Businesses also use sinking funds to build savings to make major purchases– again, so there is a softer financial hit when comes time to put out the money for the purchase. The same tool and principles can be used by us as individuals. A couple of weeks ago, I wrote an article entitled, “Operate Your Life Like a Business” and that’s because it is business. Just as businesses have large debts that have to be paid and purchases that have to be made, so do individuals.

Sinking Funds for Individuals

You can use sinking funds for just about anything. Some people use them to save up money to make a settlement offer on a large and aging debt, like a medical bill. If it’s an interest incurring debt, you’ll have to do the math to see if it’s worth it to slow down repayment to store cash up on the side to make an offer or whether it’s better to just throw all the extra money at repaying the full debt. While it could definitely benefit you for non-interest debt, it may not prove beneficial for interest incurring debt. So, do the math.

The Most Practical Way to Use Sinking Funds

I love sinking fund for saving for “wasting assets,” like a replacement vehicle. You know your vehicle isn’t going to last forever and when it comes time to replace it, if you’re not prepared, you’re going to suffer a financial hit and likely walk away with debt- another car loan. Y’all we’re tying to get away from situations like that.  But it may take us years to get to a point where we can pay cash for major purchases like that and that’s where sinking funds 

can help. Use them for any of the below, or more:

  • A replacement vehicle
  • Semi-annual car insurance
  • Property taxes
  • Back to school clothes and supplies
  • Christmas gifts
  • Family summer vacation
  • Private school or college tuition
  • Wedding and honeymoon
  • A new home

Your sinking fund is separate from your emergency savings account. Your emergency savings is your, “Do Not Touch” money. It’s there for true emergencies, including a major repair or loss of income.  Your sinking fund is for anticipated expenses- things you know you will eventually need to spend money on and want to prepare for.

How to Get Started

Many banks (especially online banks), allow you to create multiple subaccounts off one major account. If you don’t already have one, consider getting one. It’s a major advantage because you can create subaccounts, with a unique name to identify each sinking fund (i.e., Back2School, Christmas Fund, Disney World, etc.). You can be as creative as you want to be. You can also opt to keep all the money in one account (separate from your emergency account) and then keep a notepad for tracking how much money is designated for each category. I like the former. It goes a long way, to be able to log into your bank account and see exactly how much you have for each category.

More to Consider

Keep in mind, the more accounts you have, you’ll be spreading yourself thin. The benefit is, you’ll be ahead of where you were last year. You’ll already be thinking about and starting to plan for things that you know you’ll have to kick out money for. You can slow down on some and ramp up others, as the needs approach. You can also pull back on miscellaneous spending to free up money and/or get a side hustle to create a surplus to throw towards your funds and speed up your progress. Some funds may build over several months (i.e., Christmas Fund), some for a year (i.e., Disney World), and some for years (i.e., new home). Find your rhythm.

Conclusion

Your finances are your business—I mean actual business. Do what’s good for you and your family, but if you haven’t been using sinking fund, you may be missing an important tool in your personal finance arsenal. I can almost guarantee that once you start using them, you’ll find them invaluable. I would love to hear whether that proves to be true for you or if you’re already using them.