A sinking fund is different from your emergency fund; it is a sum of money that you set aside for planned expenses. If an emergency fund is reserved for something that happens out of the blue, a sinking fund is reserved for planned expenses.
Having a sinking fund, by setting money aside monthly, can prevent you from using your emergency fund. This is important for you not to use up your safety net and still stay on budget. Now that you know what a sinking fund is, the question arises about the amount you should set aside.
Can you have more than one sinking fund?
You can have more than one sinking fund. It depends on what your financial goals are and when you plan on achieving them. It also depends on what you need to buy and what the best time for buying it is. You have to take into account the surplus you have each month, and the time you need to save up the money in.
How much money should you put in your sinking fund?
It largely depends on how much savings you have after paying all of the expenses. Let?s say – you have $1000 left for each month. Now you?ll decide how much of it should be allocated towards each fund account depending on the priority and the amount of money required by the expense needs, which are to be funded.
You can divide $1000 among your sinking funds like so:
- $300 for buying your house
- $170 for car purchase
- $150 for travel
- $150 for Christmas celebration
- $230 for your child
The above numbers are just an example to give you an idea of how to go about allocating money to your sinking funds. By consistently saving this amount each month, you?ll end up saving $12,000 for the whole year.
The efficient way of handling your sinking fund planning
Another way to decide on how to save for your sinking fund is to set a reasonable price tag on your planned expenditure. You need to find the right amount that needs to be set aside, as it can be tempting to save too much or too little. Save too little, and you?ll end up realizing you haven?t saved enough. Save more, and you?ll struggle to get by every month.
Let?s say you need $5000. How much will you be able to set aside every month? $500? Within 10 months, you?ll have your planned expense funded and that too without going into debt.
In other cases, you might already have a deadline set. It can either be your sister?s wedding or your wife?s birthday. With the deadline set, you don?t have to decide on how much you?ll have to squeeze out. If anything, the decided number will only go up for you to fund the expense before time. You might end up losing a huge amount monthly, but it will take these finances off of your credit card.
So, for instance, you have to save $800 for your wife?s birthday, you?ll just have to divide your target by, say, 4 months, and you?ll determine how much you have to save every month.
Being able to set up a sinking fund is a financial skill that will help you manage your money better and focus on your savings goals. This will help reduce a lot of your financial stress as you won?t be relying on emergency funds and will be tracking the sinking fund separately.