With the rising living costs and stagnating salaries, many people feel they don’t have enough money to put aside. Though there are certain limits on how much people can save, there are ways to gradually expand your savings, even if it’s a few dollars each month. Among these strategies is something called “Sinking Funds.” They are one of the easiest practices to be added to the best personal budgeting software to have real control over your money. But, what exactly is a sinking fund? Let’s find out.
Personal Finance Basics:
What Are Sinking Funds?
A sinking fund is your savings account set aside to cover a planned future expense. In other words, sinking funds can also be seen as savings for large purchases. You save them and build them up with the extra money you have.
Some examples of a sinking fund could be:
- Basic home maintenance (e.g., chimney cleaning, boiler maintenance, etc.)
- Car repairs/ maintenance
- Medical expenses
- A wedding
Using a sinking fund increases your spending power without causing you to raid your emergency savings or utilize credit. Moreover, you can also save money by avoiding interest on a credit card balance.
Sinking Vs. Emergency Funds: What Makes Them Different?
Sinking and emergency funds may seem like the same thing but are different. Emergency funds are the savings you have squirreled away for unexpected expenses. But, sinking funds are costs expected. You know they are going to happen and have an idea when.
How To Build A Sinking Fund
Determine What You Want To Save For
This step entails setting a goal or anything you’d like to purchase. For instance, let’s assume you make a sinking fund for Christmas so you aren’t broke when the holiday season arrives.
Determine How Much You Should Save
To determine how much money to save, take the total amount you want to spend and divide it by the years, months, or weeks you have left until you need to purchase.
For example, you have almost four months to save if you want to spend $1200 on Christmas and July. You need to stash away about $400 each month until December.
Incorporate Your Sinking Funds Into Your Budget
The most important step in creating a sinking fund is; A sinking fund can only work if it’s within your budget. That way, you can constantly set money aside for your goals.
Benefits Of Having A Sinking Fund
- Maintain a balanced budget: As you can plan for your known expenses, you’ll be less likely to put costs on a credit card, leading to debt.
- Make your money work for you: Remodel your house, take the trip of your dreams, or invest however you like it. Mold your money according to what you want to do, month after month.
- Your emergency savings remain intact: The purpose of an emergency fund is to be used in emergencies. But, by putting funds aside for known expenses, you keep your emergency fund for those things you couldn’t see coming.
- Peace of mind: As you’ve already budgeted for the big expenses, you can spend money on little treats for yourself, knowing you won’t be left short on cash.
A little strategic saving can make a difference in your overall finances. The biggest thing you’ll need is patience and a plan. After all, saving up ahead of time reduces stress and improves your finances.
Ready to start your journey towards building a strong sinking fund? Book a consultation from companies like My EasyFi today and learn more about financial tools & software!