Sinking funds have been a game changer when it comes to organising my finances. Car insurance had always been a significant annual expense that I used to dread; and while I’m not sure anyone looks forward to paying it, I didn’t like how I always saved less that month or worried about how much it might cost. But when I started to put a little bit aside for it each month and kept the money earmarked away from my savings and current account, I felt more in control and less worried about it. This became my first sinking fund.
What is a sinking fund?
A sinking fund is a pot of money put aside for a predetermined, irregular expense. It’s generally for an expense that you know is coming up – such as Christmas or a birthday – which doesn’t occur frequently enough to add it into a weekly or monthly budget. Having a sinking fund allows you to spread the cost so your budget or bank account isn’t taking a big hit in one month.
Examples of sinking funds
You could choose to have a sinking fund almost anything but the most popular ones include: holidays, Christmas, car insurance and/or maintenance, school uniform and house furniture. These are all examples of items that you’re unlikely to be buying every month; but saving for them each month allows you to spread the cost of your purchases in a more affordable way.
How to set up a sinking fund
Decide what you’re saving for – Decide what you want to save up for; maybe there’s an annual expense you always forget about until the week before it’s due, or you’re always feeling stressed about how you’ll afford. Christmas.
Set a budget – For something like car insurance, look back to how much you paid last year as a rough estimation of your budget (personally, I prefer to add 10-15% onto this since the final amount is somewhat out of my control. If you’re creating a sinking fund for a birthday, Christmas or holidays, then choose a budget based on what you can afford to spend rather than what you want to spend.
How long do you have to save? – Look at how long you have to save and divide your budget by the number of paydays you have between now and when it’s due. So, let’s say you have 10 months to save £500 for a holiday, you’d have to save £50 a month to reach your sinking fund target.
Which banks have sinking funds features?
These days most banks have a feature that allow you to divide your money into separate pots under one current account. Monzo* has their Pots feature, Starling has Saving Spaces while Plum* has Pockets. While they all have different names, they essential do the same job of allowing you to save for different events, bills or occasions with the convenience of keeping it all under one account. It’s worth seeing whether your bank offers this feature – if it doesn’t and you don’t want to set one up, there’s nothing wrong with keeping all your sinking fund money in one account and having a spreadsheet to keep track of how much you’ve saved for each bill or occasion.
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