Sinking Funds – What are they?

Ok … hold up… what are these sinking funds I hear you talking about? Rainy day funds, stash, reserves, kitty, dips… there are so many other names for sinking funds.. but they are essentially money put aside for big expenses that are coming.

The idea is that you save little and often, over time, in order to accumulate enough money for a large expense. The due date is usually known, and also the total amount needed is also usually known and certainly the goal! Examples include Christmas, Birthdays, Back to school and Insurances.

Why use Sinking Funds?

Less stressed about trying to save a large amount. Less likely to panic about the sudden onset of a large expense. Less likely to increase your debt, which could cause more stress down the line, as it slows down your progress. Less likely to dip into your emergency fund and savings.

Sinking funds give you an amazing peace of mind!

Imagine this Christmas, being able to afford to buy your loved ones presents, without any stress or worry. Being able to enjoy this season, without the stress and financial worries in January. The first year we saved ahead for Christmas, I couldn’t believe the peace of mind it gave me.

Ok! I like it, how do I start using Sinking Funds?

So first you need to plan ahead. What large expenses do you having coming up? What expenses to you struggle to cash flow, year on year? I have sinking funds towards braces for my daughter, back to school, birthdays, Christmas, car maintenance and holidays.

Then with your chosen sinking funds, you need to decide when it is due and how much you need to save. This will help you prioritise your categories.

For example: Christmas, target amount €1,000, Due 1st December.

Next you need to decide how you are going to tackle this sinking funds. There are two main ways people save towards sinking funds. You can take that target amount for each sinking fund and divide it by the number of weeks till it is due. The second way is the way that I tackle sinking funds, and that is to tackle by priority, or due date. So I am concentrating on Back to school currently, as that will be due very soon, once I have paid that fund I will move onto funds like Christmas. It is up to you which method you choose to use, I have used both, and both work really well.

Where should you save your Sinking Funds?

You can save into envelopes using cash. I like this method, its easy to see and its tangible. Its good for people that are visual and like to see what their sinking funds are and exactly what they are saving towards.

The second option is to save into digital envelopes. Currently in Ireland, there is a company called Revolut that has a facility called saving vaults. There are other companies, especially in other countries that have similar facilities. These are separate “digital envelopes” to save money in, and you can name each one the name of your sinking fund.

The third option is an account that consolidates your money. So your sinking funds are all lumped together in the same account. This I feel is not the most straight forward option, as it involves a bit of paperwork on your behalf, to know what you are putting towards each category.

I personally use a mixture of the first two options. I like to save cash into each sinking fund in my sinking fund binder.. however once the category gets to a certain amount I transfer it to my Revolut account and place it into its relevant vault. This is great for safety reasons and it also means that I can buy items online, or transfer money if I need to.

I hope this helps you to understand sinking funds, and what a useful tool they can be!

Do you use Sinking Funds? Let me know down below!