It is likely that somewhere along the way, you have heard about emergency funds and the importance of having one of your own. These cash stashes will be waiting for you when the unexpected happens, like a surprise medical bill or a burst pipe in your house. But what about those costs that you technically know are coming somewhere down the line, but they are not yet part of your regular, day-to-day budget?
This could be a roof you realize will eventually need replacing or a new set of tires after you hit a certain mileage on your car. In these situations, a sinking fund can be exactly what you need to ensure you have the cash on hand, without depleting the funds necessary for your everyday expenses or wiping out your emergency stores.
What is a sinking fund?
A sinking fund is “another name for money you save a little bit at a time for a specific purchase in the future,” said NerdWallet. This can refer to “infrequent bills,” such as your pet’s annual teeth cleaning or mulching your yard, or a “large one-time expense,” like a down payment on a home or an engagement ring, said CNBC Select.
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The type of expenses that make sense to cover with a sinking fund are those that are “generally more predictable than emergencies but less so than recurring spending, and they don’t occur often,” said NerdWallet.
When can a sinking fund come in handy?
Having a sinking fund adds a forward-looking component to your budget, allowing you to earmark specific savings goals and start stashing away money for them. This ensures the expected funds are there when you need them, which can prevent you from falling back on credit, dipping into your other savings buckets or derailing your regular monthly budget when the expense arises.
While you can dedicate a sinking fund to any range of expenses, some of the most common uses include:
- Home maintenance and repairs
- Expensive appliances or electronics
- Furniture
- Vehicle maintenance and repairs
- Pet care costs
- Birthdays and holidays
- Vacations
- Wedding and engagement expenses
- Baby expenses
How can you start a sinking fund?
What sets a sinking fund apart from other savings is that it “focuses on one specific savings goal” rather than being more broadly for the future and any emergencies that may arise, said Discover. As such, one of the first steps in setting up a sinking fund is determining what goal you are putting away money for, how much you will need and what your deadline for meeting your goal will be.
From there, determine how much is necessary to set aside each month to meet your goal by the assigned deadline, as well as where you will be putting those funds. Ideally, “you want your sinking funds to earn as much interest as possible while remaining somewhat accessible,” said CNBC Select. A high-yield savings account can be a good candidate for this, especially given that “some banks allow you to open a main savings account with multiple subaccounts,” said SoFi, making it even easier to know which amount is going where.
