Having prudently built your emergency fund for life’s unpredictable financial hiccups, and your budget has a little wiggle room, the realization sets in that savings cannot always be for the next unplanned expense. Sometimes you need to treat yourself and live a little. You need to budget in fun. Insert a sinking fund into your budget.
What is a sinking fund? A sinking fund is intentional money, money that you spend on a particular need or want in the future that rarely occurs. Think of this savings category as fun money. These funds are critical to your financial well being since they allow you to live and enjoy life without disrupting your day to day finances.
Set goals for future big ticket purchases, big family trips, home improvement projects, a new-to-you car, etc. These purchases shouldn’t feel unattainable. Get strategic and set aside a little money every month in one or multiple categories for later use in sinking funds.
By strategically setting aside money into one or more sinking funds you are being a good steward with your money. Building fun money into your budget is preparing your financial wallet for planned expenses throughout the year.
Some examples of how my family uses our sinking funds:
- Even though we don’t currently have car payments, we make payments to ourselves. Our day-to-day cars are getting up there in mileage and we will eventually need to replace them. One of our sinking funds will cover a new-to-me car.
- After researching a new deck and realizing the prohibitive costs of a newly designed outdoor space, we are using another sinking fund to order the materials and refreshing our existing deck ourselves.
- Since money burns a hole in my teen’s pocket, I’ve added a fifth category that his income can be divided into: spend now, sinking fund, savings, giving and investing. The money in his sinking fund is set aside for bigger ticket items, usually for purchases 3-6 months out.
How do you create a sinking fund? Make small deposits on a schedule that works for you so you can grow your short-term savings to cover the expense without accruing debt. Keep adding to your sinking fund until you reach your savings goal. Once your sinking fund is full, you can freely spend the money without having to worry about busting your budget. Just don’t forget to rebuild your sinking fund for your next short-term savings goal.
Start your sinking fund today so you don’t have to stress about how you’ll pay for that vacation of a lifetime, the car you’ve been jonesing for or that home improvement project that you’ve been dreaming of doing. That way, when an opportunity lands in your lap, you can unequivocally say yes since your sinking fund has those costs covered.