As small children, we learn to save up our money for expensive things that we want to purchase. It may take 5 weeks of our allowance to buy the computer game that we really wanted, but Dad said that if we save, then it’s all ours.
When we grow up, this does not change. Saving is an important part of budgeting our money and staying out of debt. If you have ever saved up to pay for something, then you have created a sinking fund all by yourself.
Basically, a sinking fund is a savings account for a certain expense that we foresee in our future. This could be plane tickets, a wedding, a nice couch we have had our eye on, or even something basic like car or life insurance.
It is important that we create sinking funds and contribute money to them with every paycheck. This prevents us from having to dish out large sums of money in the future when we have very little wiggle room in our monthly budgets.
For example, let’s think about Christmas. It’s the end of November, and our bellies are full from Thanksgiving turkey. Suddenly, Christmas trees are going up in homes and Santa has made it to the mall. December is upon us and it is time to start our Christmas shopping. The past few months we have worked hard to stay out of debt and to not overspend. Our bills are paid and we have a little money left over each month. However, our December budget won’t cover all of those Christmas gifts we have realized it is time to buy. In order to cover Christmas shopping, we are going to have to use up nearly all of our savings. If only we had been saving specifically for Christmas.
A sinking fund is so helpful in this situation. We can save a little each month out of the year to put aside in a special place for Christmas savings. When December comes, our Holiday sinking fund will be more than enough. There is no debt and our budget is still intact!
Sinking funds can be created to cover special events, like weddings or holidays, or to pay for vacations, a new car, or even home repairs. The key is to just make sure that we are contributing a little sum of money each month into the savings. If you only have one savings account that you are using for all your different funds, then you can use a spreadsheet to keep track of how much money you have saved for each item or event.
There will often be material things that we want in life, and that is normal and healthy. Spending money is not a bad thing, as long as we have prepared to pay for what we want. When we save up our money, we are making smart purchases. As we save, we are also able to think carefully about what we are buying; our spending will no longer be impulsive.
No one wants to have to ruin their budget just to go on family vacation or to get new tires put on the car. Save up ahead of time and be prepared!
For ways to save your sinking funds check out these articles to give you some ideas. My personal favorite is Digit that saves without you even have to think about it.