Many people use Sinking Funds (SF) and others don’t know what they are. Chances are if you read about personal finance or think about money, bills, or how to pay for comforts like a vacation, than you could benefit from a Sinking Fund. A Sinking Fund is essentially a separate savings bucket, cash or electronic, that you save regularly for a specific purpose. This allows you to include the goals or expenses in your budget, especially ones that are hard to predict or aren’t billed regularly.
Most people use their monthly income to budget for regular bills, retirement investments, and emergency funds. While an emergency fund is meant to remain in cash (not invested) in case of unexpected expenses, such as job loss, car repairs, home repairs, and the like, Sinking Funds are for planned expenses that exceed your monthly budget.
Some people use the cash envelope budget system and for those folks, an envelope for each SF will suffice. For the rest of us who use debit and credit cards, as well as checking and savings accounts, I find a high interest savings account is best, especially one that allows for multiple accounts, such as Ally or Capital One. Make sure your bank is FDIC insured.
Sinking Funds examples:
- Home repair and renovations (bathroom update, new generator, etc)
- Holiday presents (family & teachers)
- Kids classes & equipment (music, karate, swim, etc)
- New Car down payment (buy or lease)
- Health Insurance Deductibles
- Family vacations
- Summer Camp
- College Dorm setup