Have you tried saving for something in the past and ended up spending the money on something else first? Creating a sinking fund may be just the answer you’re looking for!
What is a Sinking Fund?
A sinking fund is simply a savings account set aside for a specific purpose. It could be Christmas, a child’s birthday, car payment, or a vacation savings fund.
You set aside a certain amount of money monthly to go to this account in order to pay for the item at a later date.
Christmas is the best example. It happens every year, and yet to many it comes as a surprise and there is no money to buy gifts. By creating a sinking fund you can put away enough money to pay for everything you need next year.
What Do I Do?
Fist, decide what you are saving the money for; it could be something inexpensive that takes only a month or two to save, or it could be something that takes a year or more to save enough money to purchase.
Once you know what your goal is and how much money you need to save in total, now divide that number by how many months you have until you need to pay this total amount. That will give you the amount you need to set aside monthly to meet your goal.
Where Do I Put the Money?
There are a few options available, you can make a new savings account just for this item, or, if you’re a Dave Ramsey fan, you can save actual cash in an envelope.
If you prefer to keep your money in the bank, just make sure that the bank doesn’t require a minimum savings balance so that you aren’t charged fees as you begin making deposits and as you pay the total after the savings period is over.
The other thing to watch out for is making sure the money isn’t used for other things. If you only have one savings account then your money will likely go other places without you even realizing it. It is best to set up a separate account just for this item.
The cash method is usually easier just for that reason. You can easily make an envelope for Christmas, one for a birthday, one for a new car, and one for a vacation all at the same time if you wish. It is more difficult to set up multiple bank accounts and keep track of them than it is to keep the envelopes separated for each purpose.
That being said, if your envelope will contain thousands of dollars in the end, it may be more secure in the bank than in your closet at home.
Either method you choose will be rewarding and will leave you prepared! Pick a goal and start a sinking fund this month.
For more budgeting and credit repair advice, check out our tips and tricks page.
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