Sinking Funds Can Save Your Financial Life
Have you heard of sinking funds? They are the answers to your prayers! In terms of personal finance, a sinking fund is basically a fund that you allot to cover expenses which you know will come up over time. It is going to save your financial life – I recommend them no matter which stage of life of journey you are in!
Examples for things that you can include in your sinking fund are:
- Car maintenance
- Car repairs
- Annual bills
- Kids parties
- Home repairs/new appliances
There is a difference between sinking funds and other saving pots, so I think it’s a good idea to have a look at how they differentiate so it’s easy to understand.
It doesn’t need to be a complicated process and feel like you have a million savings accounts – but it will help you get on top of your finances and you will be grateful to yourself for setting them up.
There is the emergency fund, which is aptly named as it is for emergencies only.
These are not the kind of emergencies like forgetting your sisters birthday and having to get a last minute present – but the type of emergencies that you cannot prepare for, such as the sudden death of a close family member.
Then there are other saving pots such as a retirement fund, which you will ideally be paying into each month and will not touch at all until you are at a retirement age!
Just by briefly mentioning a couple of saving funds that you should hopefully have set up, you should be able to see a distinction between them and the sinking funds that I am suggesting: that you should not be touching the money in your emergency fund or retirement fund until you absolutely have to (at an emergency situation or at retirement age!).
With a sinking fund, these are expenses that you count on needing to spend, and that’s ok. There is nothing wrong with spending money, as we all have to do it!
Have you ever tried to save up for something like a house deposit, or a new car, but had something come up that you had to drain your savings for? Well you wouldn’t be alone!
Many people find that they are unable to reach their financial goals simply because when even when you manage to actually save some money, something happens and you end up being left with no savings.
This happens over and over again and you look around realising that you have been living in the same house for 10 years and moaning that you don’t like it – but have no new house savings to show for it.
It’s easily done – things do come up that need to be paid for, such as birthdays and Christmas can get crazy! Your car will need annual checks, your kettle will probably break at some point, etc etc.
These things happen, but saving for them in separate accounts will help you to keep your important savings for your goals intact.
After all, you don’t really want to use your precious new house savings for car maintenance or a broken toaster do you? That may sound ridiculous, but that is what happens!
The best thing that I can recommend is for you to first create a zero sum budget. I have done a post all about it but the general gist is that you allocate each little bit of your money to a category.
Look at all of the income that you receive (salary, benefits etc) and also your expenses. Don’t guess your expenses – have a look through your bank statements and you will be able to see how much has been going out each month.
Once you have allocated all of your main bills (mortgage, electricity etc) and you have gotten them as low as possible through negotiating with your providers, you can see how much money you are left with.
Some people do this the other way around but your bills are very important – you need to be able to pay your mortgage and buy some food!
So once you have your money that is left over after paying your bills, you can allocate it to fit your goals as you wish.
You may want to have a category for fun money each month for stuff like nights out with friends, dates, trips to Starbucks, hobbies etc, and then you can also look at things which you are working towards.
Examples of this as previously mentioned could be:
- Emergency fund
- Retirement fund
- Sinking funds
The emergency fund is for real, scary emergencies that you can’t really prepare for. You will appreciate having this SO much when something like this happens to you and you don’t want the added stress of drumming together a ton of money at short notice.
The retirement fund is clearly for when you retire. Each country and the general economy cannot be counted on to help you when you are in your old age – you need to save money for yourself.
When you are elderly, you do not want to have to worry about heating or eating – it is very important that you save money on top of any pension that you also pay in to.
Sinking funds are for the little expenses that pop up on a regular basis, that can ruin the saving that you are working so hard on for your large financial goals.
We all have large financial goals, and they tend to vary from person to person, but it is largely things like a new house deposit or a new car. They could be travelling the world, or going on a couple of huge holidays each year.
I love big financial goals, and I encourage everyone to have them. I believe that it is important to have things to work on and look forward to, as they encourage us to work hard and be motivated for the future. The future can feel like a very elusive place, but it comes around quicker than you realise!
Write down everything that you will need to pay for this year, and you may want to include next year too. The bullet points at the top of the post should be a good starting point. A lot of people tend to forget at least one thing – such as annual insurance, etc.
You can look back through your bank statements and see what you have had to pay each month, and this should be helpful. It’s up to you to decide how much to allocate to each thing e.g. how much do you want to go in your car repair pot? It’s hard to know how much it is to repair various bits of your car, so you may want to put in more than you think you will need.
If you have done a zero sum budget and reduced all of your expenses as low as you possibly can, this should leave you (I hope!) with some money left over that you can allocate to these various saving pots.
I would recommend not just saying that you will save this money, but automating it as well. Set up direct debits within your bank account and then you can forget about it.
If you don’t have that much left over, and you are adamant that you still need spending money for treats, there are other ways in which you can get money for your sinking funds. The ways that I love earning extra cash for my goals are:
All in all, sinking funds are one of the best ways to reach your financial goals, which also tend to be big life goals as well.
It’s not worth putting off your goals further and further into the distance, when you are able to do something as simple as saving up for various annual expenses which are certain to crop up, so that you are covered in all areas.
How amazing does that sound? To have money there ready for an emergency situation, retirement – but also being able to cover random expenses that pop up – AND being able to achieve all of your financial goals as well?!
To me, it is more than worth setting up some systems to ensure that I will not be stressed about money at any point, but be able to achieve my dreams as well.
We can’t predict the future, but we do know that things will inevitably happen, and preparing for them as best as we can will ensure our continued success.
What do you think? Do you use sinking funds or would you like to start them?