Let’s begin with what is a sinking fund –
A sinking fund is a way to save up for expenses that you can plan. These expenses do not occur often so they are not accounted for in your regular budget. Having a sinking fund helps you save up for something you need to buy or something you need to pay for, without tapping into your emergency fund.
An emergency fund is for unplanned expenses that may come your way. A sinking fund is for planned expenses. It is a straightforward process and once you start incorporating it, it can be a game-changer for you.
Here are a few simple steps to get started –
1. Create a Budget
If you don’t already have a budget, you need to start making one. Having all your expenses and income listed out in front of you makes it easier to plan a workable budget. After deducting the non-discretionary expenses, you can see what is left and what other payments you need to make.
After calculating all the expenses and the surplus, you can plan how much you can afford to use for a sinking fund. You can start one or as many as you like depending on what all you are planning to get.
2. Determine for What Purchases You Would Like to Create a Sinking Fund
Having financial goals is important to set a realistic budget. Now, there are going to be many things that you would like to save for, but you have to be picky here based on how much money you can spare. Here’s what you can do –
- Make a list of all your financial goals. ( For example, going on a holiday, buying a car, saving up for a new course you would like to take, etc.)
- Write down the cost estimate for each of these things.
- Now, prioritize the items on the list.
- Set monthly saving amounts for each item on the list based on the priority.
3. Calculate How Much You Need to Set Aside for Each Goal
Usually, when we want things, we know by when we want it. Like if you want to save up for going on a holiday, you will have a rough estimate date or month that you set aside for vacations. Or if you are saving up for a course, you know when the commence date is and when you have to pay the fees.
- Use this date as the deadline and the date you start saving as the starting point.
- Calculate the number of weeks between the starting point and the deadline.
- Divide the amount you need to save by the number of weeks you have to save the amount.
This will give you a rough estimate of how much money to put aside for each goal on your list.
For example, suppose you want to put $1000 aside for your anniversary celebration that is 3 months down the line. You can divide $1000 by 3 months and you will get the amount that you need to save each month, which will be $333.33.
Calculating by weeks makes the amount seem small and because most people get paid weekly or biweekly, it also makes the most sense. So, here you will divide $1000 by 13 weeks (3 months). You will have to save $76.92 each week.
Having a sinking fund can be a lifesaver because that way you won’t be touching your emergency fund, you will be spending on things that you absolutely need or want – no more impulse purchases, you will not shake your monthly budget, and you will save money without straining yourself about the fact.
As you start saving toward each of your financial goals, you will see the money grow for each thing. The amount might seem small but it adds up, and that will motivate you to do more.
Once you have a working plan, you will need to decide where to save the money and how to make sure you are saving the set amount each week. To know about that, come back next week.