Do you ever find yourself scrambling around for money when certain events crop up? Do you spend time worrying about how you are going to be able to afford Christmas this year without going into debt? Or how you’re going to pay that big bill that’s due in August? If this sounds like you then sinking funds may be the answer. Hand on heart, I don’t know how I ever coped before I set up my sinking funds. When birthdays and anniversaries come along I have the money sitting there waiting to be spent. This is because I have been saving small amounts for these events throughout the year.
What are Sinking Funds?
A sinking fund is simply money that you set aside each month and save specifically for a big event or a big bill. You set aside this money as part of your basic monthly budget. It alleviates the need for dipping into your long-term savings or emergency fund or even worse- going into debt or getting further into debt. Sinking funds are for PLANNED expenses, whereas your emergency fund is there for UNPLANNED expenses. This is why you want to never touch your emergency fund for a planned expense- you never know when an emergency will occur. If you have spent your emergency fund on Christmas presents (Christmas is not an emergency) and you lose your job right after Christmas then you won’t have your emergency fund to bail you out.
What is the Difference Between Sinking Funds and Savings?
While both sinking funds and savings have the same end goal- to save money – there is a big difference between the two. Your savings are for building wealth. Your sinking funds are savings for a specific purpose with the intention of spending the money you have saved.
The Importance of Sinking Funds
Before I became interested in personal finance and before I even knew what a budget was I would use my debit card and credit card for absolutely everything. I had no savings in place- just the money that was in my current account. Often there was no money at all in there and I’d be relying on my overdraft! A birthday would come along and I’d use my card. The car would need repaired and I’d use my card. The dog needed a trip to the vet- yep, out came the card again. Any family holidays would be put on credit as there was just never enough money for that! I could never quite get on top of it all. I knew these expenses would crop up but I had no strategy in place to prepare for them. Now that I have a budget in place I am able to see exactly what I need to plan for and have been able to set up sinking funds in order to protect my emergency fund and my sanity! Benefits of sinking funds include:
- Less stress. You know you will be prepared when the car needs servicing or the cat needs to go to the vet.
- Have fun without the guilt. If you have a sinking fun for fun activities you can then enjoy those activities guilt-free, knowing you have planned for them and been saving for them.
- Protected emergency fund. When you have sinking funds in place you can relax knowing that your emergency fund is safe and ready to be used during an actual emergency and not spent on a planned expense.
- Less wasteful spending. Your money now has a goal and is less likely to be frittered away.
How Do Sinking Funds Work?
First up, you need to decide how much you can save. It is important to make sure that this figure is a realistic one. There is nothing more demoralising than transferring too much into your savings and then having to transfer some of it back again (I say this from past experience!).
Next, you need to decide what you want to save for. See further down for some examples. You can have as many as 10 or even 20 saving goals or as few as 1 or 2. I currently have 9 sinking funds.
Then start saving! You can save weekly or monthly- do whatever works best for you and your budget. I save weekly as we are paid weekly by most of our customers and I find it easier to see a smaller amount leave my account each week than a big lump sum every month.
To find out the amount you need to save each month all you have to do is take the amount to be saved and divide it by the amount of months you have left to save. For example, say you would like to save £300 in time for for your next car service, which is 8 months away. You simply divide 300 by 8. So you would need to save £37.50 per month for this goal (or £9.30 per week).
What Can I Use Sinking Funds For?
You can set up a sinking fund for absolutely anything! Here are some examples:
- Pets (flea treatment, vet visits etc)
- Home repairs
- Fun days out
- Car insurance
- Car service/ MOT
- Council Tax
- School Uniform
Where Should I Keep My Sinking Funds?
Okay, so you’ve decided that sinking funds are for you but where should you keep this money? You can keep them anywhere! Some people like to save the money at home and some prefer to keep their savings in a bank account. I don’t like to keep too much money at home so I have set up a Starling account and it’s super easy to use. It’s just an online account and you can have various ‘pots’ (which are essentially just separate saving pots within the one main account) in which to save. Just set up a standing order with your regular bank account and the money will automatically move from your current account to your Starling account. The money in each saving pot will grow each month and it is there to use whenever you need it. Of course, you can keep your sinking funds in your regular bank account and keep a note somewhere of how much you’ve got saved for your goals. Personally, I would find it very hard to keep track of things this way and I much prefer having my sinking funds kept totally separately to my current account.
My Personal Sinking Funds
I can’t rate sinking funds enough. They have undoubtedly stopped me from dipping into my savings on numerous occasions. I have quite a few different pots within my Starling account. I’ll list them below with how much I pay in to them each week.
- Birthday Pot – £7
- New Boiler Pot – £10
- Tax Man Pot – £50
- Holiday Pot – £15
- Christmas Pot – £15
- Car/Van Pot – £15
- School Trip Pot – £15
- School Uniform Pot – £10
TOTAL WEEKLY COST – £137
I also have a ‘pet’ pot but I am no longer contributing to this as I have reached my £500 goal. So I now have £500 sitting there in case my dog or cats needs a trip to the vets (we also have pet insurance).
I’d love to know if you use sinking funds and if you find them helpful X