Banking

5 minute read

Types of Sinking Fund: Which is Right for You?

June 3, 2021

Growing up, your parents and grandparents will often advise you to put money away for emergencies, for retirement, or just for a rainy day. But there’s another purpose for saving money that a lot of people choose these days: a sinking fund. It’s easy and it makes sense. Best of all, it will help you to budget and take control of your finances. But what is a sinking fund and how can you use it?

What is a sinking fund used for?

A sinking fund is different to regular savings because it has a specific purpose.

An emergency fund is just that: for emergencies.

Maybe your washing machine broke, or you got an unexpected bill.

That’s where your emergency fund comes into play.

A retirement fund is pretty self-explanatory.

But a sinking fund? This is for funds you regularly put aside to save for a fixed financial goal.

For example, perhaps you know that you intend to buy a house in a couple of years, but you need to save a deposit.

A sinking fund is perfect for this, as you’ll put money aside each month until you reach the goal figure. Say you put aside $500 a month into your sinking fund. By the time the two years is up you’ll have a deposit of $12,000.

Then you can start a new sinking fund for a new goal.

There are lots of other types of sinking fund that you can choose from.

How much to put in a sinking fund

This will vary based on what your monthly income is, what your existing outgoings are, what it is you need to save for and the length of time you have available until your goal.

It’s entirely up to you.

Say your car insurance has an annual premium of $1,600.

They may offer a monthly payment plan to spread the payments, but that usually incurs an interest fee, meaning you’re paying more than you have to.

Start a sinking fund for your car insurance, and not only will you save the extra payment to them, you’ll actually earn interest. If you put away $133.33 a month, you’ll have your premium saved by the end of the year.

If you want to work out how much to put in, you can use a sinking fund calculator which will do all the figuring out for you.

How to organize sinking funds

You should organise key areas of your life into separate categories.

Make a sinking funds list to break down your priorities.

You could have a sinking fund for home maintenance, one for car expenses, and so on.

By creating sinking funds categories, you’ll be able to stay on top of the biggest expenses and the most urgent.

Types of Sinking Fund

Home maintenance sinking fund

Whether you rent or buy, you’ll have certain costs involved.

Things like home or renter’s insurance and property upkeep charges can add up.

If you’re renting, the landlord will have more financial responsibility, sure, but you’ll still need to insure your belongings.

If you’re a homeowner, you’ll not only have all of the above, but the cost of furnishing and decorating the property, as well as any maintenance.

A sinking fund is a great way to keep control of your budget here.

Make a list of all the necessary expenditures, then work out a monthly sinking fund schedule to begin saving.

Car expenses sinking fund

As mentioned above, car insurance premiums can be a real stinger at the end of the year, and if you haven’t got it put away beforehand, it can add a lot of extra stress to your financial worries.

Look at how much you need to spend in total on your car every year. Consider:

Insurance
Taxes
Repairs and maintenance
Surplus costs like washing and detailing

Vacations and leisure sinking fund

Saving doesn’t just have to be for boring, sensible things. If you’re on top of your finances, why not put a little in the pot for some ‘you’ time?

You could save a few dollars a month then book a spa day, a weekend away somewhere, an art class, some new golf clubs.

Whatever your heart desires!

If you want to get away somewhere, consider all the extra costs, such as car rental, travel insurance, passport fees and spending money.

Family sinking fund

It’s not cheap running a household, or giving your children opportunities for extra-curricular and academic development.

Consider creating a sinking fund so that you can cover the costs associated with parenting.

You can put some aside for:

Childcare
School trips
Sporting activities
Summer camp
Music lessons
Extra tuition
Clothing and equipment

Pet care sinking fund

Our lovable furry friends might be a part of the family, but they’re another expense we need to factor into our finances. So this is another area you could use a sinking fund for. Think about:

Pet insurance
Vet fees – think emergency, regular medication, spaying and neutering.
Food and treats
Toys and training equipment
Daycare or vacation boarding costs
Other items they need such as bedding, cages, bowls etc.

Self-employment sinking fund

If you work for yourself, you might not have a steady income that you can rely on in times of an emergency.

You might also not have the same income each month, so you possibly can’t put away the same amount every time.

Why not add a sinking fund formula to your accounts?

Decide what you need to put aside in total, then work out how much you can afford to put in from different monthly salaries. For example, if one month you have a spare $150, put that in, but if in other months it’s $500 or even just $50, great. It all adds up.

Don’t forget there are costs associated with being self-employed as well. So create a sinking fund for

Taxes
Business costs such as web domains, software subscriptions, networking membership and events
Furniture and office equipment, IT systems, supplies.
Business and health insurance
Extra utilities allowance if you’re working from home.
Advertising and promotions

There are other types of sinking fund out there too: funds for birthdays and holiday costs, self-care such as salon costs and gym membership, planning a wedding, or prom and graduation costs.

You can literally create a sinking fund for whatever you want!

The main thing to remember is to write down everything you need to factor into it so that you don’t have any disappointing or stressful surprises if you come up short.

The best way of organising this aspect of your finances is in a sinking fund table, which you can create in Excel.

Or there are various tracker templates online you can get for just a few bucks if you aren’t sure where to start. If you have a clear system to keep track of them, it’ll be much easier to see when you’re nearly at your goal or when you’ve still got a way to go.

Then you’ll be in more control, you’ll be calmer, and you can plan for the future better.

Do you know any other types of sinking fund not covered here? Get in touch with your comments.
Find out more about budgeting and improving your personal finance here.