Some expenses become predictable and recurring. Each month, you’ll always pay for food, housing, utilities, and other essentials. You may throw in some monthly entertainment and additional costs. You can anticipate these expenses and stay within a budget.
However, some one-off expenses will challenge your budget. You may have enough money for groceries each month, but a surprise vacation can create financial stress. Not everyone saves enough money for a significant, one-off expense, but a sinking fund can help. We’ll discuss how a sinking fund can strengthen your finances and how to set one up.
What is a Sinking Fund?
A sinking fund is a bank account allocated for an upcoming expense you won’t have to pay until later down the road. Some people start saving for the holiday season a few months in advance. You don’t have to create a sinking fund to save money, but it helps distinguish your money. Keeping your funds in the same account can lead to confusion and misallocation. You can mix up your holiday money with entertainment and not have enough funds left for the season.
You can create multiple bank accounts, label them as sinking funds, and make monthly deposits into each account. You can save up for a car, vacation, and holidays with three separate sinking fund accounts. Instead of getting caught off guard, you will be ready for the high-ticket expense. A sinking fund has several differences from other bank accounts. We will discuss them below.
Sinking Fund vs. Savings Account
A savings account is a basket for all of your funds. Most people only create this account for their financial activity. The funds in a savings account can go towards any expense. Keeping all of your funds in an uncategorized setup can get messy and lead to misallocation.
Unlike a savings account, a sinking fund has a clear purpose. A sinking fund’s proceeds go towards a single expense. You may want to plan a vacation in a few months, but you don’t want to pay for the vacation in one shot. The sinking fund gives you a chance to build reserves for a specific purchase.
Sinking Fund vs. Emergency Fund
Both funds have specific purposes. It’s better to have both of these accounts instead of mixing these funds in the same account. A sinking fund prepares you for an upcoming expense. You can anticipate a vacation, down payment, or similar cost. However, you can’t anticipate everything.
An emergency fund protects you from the unexpected. If you quit or get fired from your job, you’ll suddenly lose a significant income source. Stashing cash in your emergency fund can give you a few months to look for a new job without cutting down on your lifestyle. Both funds improve your budgeting. You tap into a sinking fund for an upcoming purchase. On the other hand, you save money in an emergency fund, hoping you’ll never have to use it.
Since you won’t need funds in these accounts for a while, you should put them in a high yield bank account. Many people turn to Current (*) for high-yield savings. You can set your money in a Current Savings Pod to earn up to a 4.00% Bonus (1) on your funds. You might as well put your money to work as you keep it tucked away. Stocks and real estate are too risky, but a 4.00% bonus on an account makes more sense.
Benefits Of Having a Sinking Fund
Not everyone wants another bank account to manage, but spreading your money across several accounts can simplify your finances. A sinking fund, in particular, has several benefits.
Save For Anything
You can create a sinking fund for any purpose. Saving up for an upcoming expense reduces its impact on your finances. You’ll feel less stressed as the deadline approaches.
Get Rid of Guilty Purchases
Sinking funds help you get rid of guilty purchases in two ways. Since your money has a purpose, it’s easier to avoid misallocation. You can distribute a percentage of each paycheck across your sinking funds before getting the chance to spend money. Sinking funds also create parameters for ‘guilty’ purchases. You can create a small sinking fund for miscellaneous items and use those proceeds accordingly. You give yourself the approval to use some of your funds for a purchase. Some people will opt against a sinking fund for guilty purchases, but it may work for others.
Prepare For Inevitable Expenses
The tax season strikes every year. It’s one of the most stressful times in people’s lives because of the financial burden. Storing funds in a sinking fund gives you a financial fortress to cover your taxes. Sinking funds help you feel prepared for tax season or any major expense instead of scrambling at the last minute. Inevitable costs will come whether you are ready or not. Sinking funds help you prepare gradually.
3 Examples of Sinking Funds
You can use sinking funds to plan several purchases. We will share three common examples of how people use sinking funds to simplify their finances.
- Car Sinking Fund: Looking to buy a new car soon? They can get expensive in a hurry. Not every buyer saves enough to make an all-cash offer. You should assess cars on the market and determine how much you want to put down. You can put money in the sinking fund each month to make a down payment in the future without straining your budget.
- House Deposit Sinking Fund: Making a house deposit tells a seller you’re serious about buying the home. This house deposit acts as part of your down payment, but not everyone has enough funds for this investment. If you make a $3,000 house deposit within the next six months, you can add $500/mo to the sinking fund. Once the day arrives, you’ll have enough proceeds to make a house deposit.
- Holiday Sinking Fund: The holidays are a time of giving, but tight finances can get in the way. A holiday sinking fund makes you less reliant on credit card debt to get gifts. You can store $50/mo in this account and have $600 ready to go during each holiday season. Want to spend more during the holidays? You can increase the monthly contribution to your holiday sinking fund.
How To Set Up a Sinking Fund
A sinking fund categorizes your money so you don’t lose track of upcoming expenses. Follow these steps to create your first sinking fund.
1. Decide How Much You Want to Save
Determine how much you need in your sinking fund account. If you spend $1,000 during the holiday season, you’ll need those proceeds in your sinking fund account.
2. Determine How Many Sinking Funds You Should Have
You don’t have to stop at one sinking fund. Personal finance gets complicated, and you have several upcoming expenses. You can create a sinking fund for an upcoming car, home, vacation, or other upcoming expense. Assess your financial goals and map out how much you’ll have to save to reach them. You can create multiple bank accounts to categorize your finances.
3. Set It Up
After the initial planning, the next step is setting up your accounts. Current (*) lets you create multiple Savings Pods and reap up to a 4.00% bonus on up to $6,000 daily. You can easily create accounts, receive up to 15x points on qualifying purchases (2) , and not worry about overdraft fees with overdraft protection of up to $200 (3) . You can visit Current’s website and create an account in less than 2 minutes to establish your sinking fund and tap into the app’s additional features, such as money management tools and contactless cash deposits.
4. Start Saving
Now that you have the infrastructure in place, the last step is to start saving. You can either raise your income or lower your expenses to accelerate savings. Current can help you every step of the way. Their mobile app lets you track spending with instant spending notifications and money management tools. This feature also allows you to find unnecessary expenses and weed them out of your budget. You can save significant money by tracking expenses and reap the benefits of up to a 4.00% bonus in Current Savings Pods. Saving is a great way to build wealth and manage your finances. Sinking funds create more clarity around your financial health and plan.
