New Year’s Financial Resolution: Creating a Sinking Fund

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Throughout the year there are celebrations we get to enjoy and spend. There are even bigger purchases like buying a new car or a new appliance for the family. Because of the gravity of the amount needed oftentimes, some ends up in debt to afford the item.

However that should not be the case.

In order to guarantee that it won’t happen again, try creating what we call is a Sinking Fund.

Sinking Fund

According to Miriam Caldwell, “sinking funds are used to pay for large expenses that are planned. You may use different sinking funds to pay for home repairs, save for a new car, pay for your vacation or to cover large medical bills.”

This means setting aside money aside before using it but not necessarily touching your savings.

A good example of the use of sinking fund is celebrations like birthdays. We know when that comes and approximately the cost of doing one. Rather than busting your budget and draining your savings in order to do the event, you can opt to start creating a sinking fund for it.

For example, if a birthday would cost you around 10,000 and the birthday will be on October, that means you have 10 months to save up for the 10,000. Starting this month, save 1,000 and put it directly to your sinking fund for the birthday event. This guarantees that by October, you will indeed be getting 10,000. You end up getting the money less the panic and no debt in the process.

Sinking Fund and Emergency Fund

The Sinking Fund is very different from your Emergency Fund. An emergency fund is setting aside money for the unknown. These are during emergencies like accidents or suddenly losing one’s job. Usually the ideal emergency fund is 6 months worth of salary. With the sinking fund, you know where that money is for, how much you would need and when to use it.

Keeping a Sinking Fund

There are many creative ways to keep your Sinking Fund. You can use an envelope to store in the money or perhaps a piggy bank stash somewhere in your closet. Just make use that you can be able to easily get to it when the time comes. This would be dependent however on the amount. If you are creating a sinking fund in order to purchase a car or bigger money goals, it would be ideal to put it in the bank. At least there’s not much cash lying around in the house.

Getting Started with the Sinking Fund

Simply identify the events or goals you would like to get funded within the year. List down those items and make sure to include the probable cost and the date.

The next thing to do is divide the amount with the months. Like the example above if you need 10,000 for a birthday come October, you need to set aside 1,000 starting January.

Then, have a dedicated place where to put those money. You can have one envelope for the birthday fund, another envelope for the travel fund and so on.

Finally, save consistently. A sinking fund would prove helpful if you get to save in the first place. Which is why include saving in your calendar or make a habit of setting aside money.

Better start your own sinking fund right now!

P.S To those doing the 52 Week Money Challenge, it is Week 3 already! Did you deposit the next amount yet?

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