If you have significant expenses, put money aside each month to achieve your objectives in a manageable way. However, there may be more effective ways to save for multiple goals than putting all your savings into one account. To be intentional about your financial goals, consider creating a sinking fund.

A sinking fund is a designated account storing money for a specific financial goal. It’s a way to set aside money for a particular purpose. With a sinking fund, you can save for different destinations by assigning the funds to other accounts and gradually building up your savings over time. This allows you to spend money on big purchases, such as travel or electronics, without feeling guilty.
Companies also use sinking funds to pay off debt, such as bonds. Rather than scrambling to pay off the lump sum when the bonds mature, companies gradually set aside funds during specific times to pay off the debt.
When you create a sinking fund, the goal is not to aim for a specific end number but rather to build up a fund you can access when needed. For example, you can set aside the same amount each month for different sinking funds, such as travel or electronics. Later on, when you’re ready to spend, you can check the sinking fund to see how much is available. This helps you decide how much to spend on a new laptop or a weekend getaway.

Why Should You Have a Sinking Fund?

Sinking funds might seem redundant as they are similar to savings accounts. However, there are several reasons why falling funds are beneficial:

• Allocation of funds to different purposes. Sinking funds enable you to use money guilt-free for specific needs. You can quickly see how much you have for each goal and use it accordingly.
• Ability to save for multiple goals simultaneously. Sinking funds allow you to work on various purposes at a time. You can track your progress and see where you stand, giving you a sense of achievement.
• The continual growth of your funds. Sinking funds are an excellent way to keep your money growing for ongoing expenses and goals. If one fund becomes too large, you can shift some funds to a different plan.

In short, sinking funds help keep your finances organized and your goals clear when saving for multiple things.

How to Start a Sinking Fund?

Starting a sinking fund is straightforward. All you need to do is create an account for each priority. You can do this by opening multiple savings accounts or looking for a bank offering sub-accounts.

Some institutions allow you to set different goals and divert funds based on your priorities. This makes it easier to track your progress and see how much you have saved for each plan.

How Many Sinking Funds Should You Have?

You can create a sinking fund for every primary goal you have. However, it’s essential to keep your funds manageable. Identify significant expenses and determine how much you can contribute each month to make them more manageable.

Depending on your circumstances, you should limit yourself to six- eight sinking funds. However, you may require fewer funds based on your financial situation.

Additionally, your institution may limit the number of sub-accounts or goals you can save for. Keep this in mind when deciding how many funds to create.

What Is a Sinking Fund and How Does It Differ From a Savings Account?

When saving for a specific goal with a regular savings account, you typically have a target amount in mind and an end date by which to reach it. For example, you could save $1,000 for holiday gift-giving and set aside $100 for ten months to achieve that goal.

A sinking fund is similar in that you save money for a specific purpose, but unlike a regular savings account, there is no end date. Instead, you decide how much money to contribute toward general goals, and when it’s time to spend, you have funds available.

Sinking Fund Example

You can set aside $500 each month and have several goals. Rather than depositing $500 into a general savings account, you can divide the money based on priorities. For example, you could create five sinking funds:

• $150 for travel
• $150 for car expenses
• $75 for home repairs
• $75 for medical costs
• $50 for electronics

At the end of the year, you would still have $6,000 in your accounts, but the money would be earmarked for different purposes:

• $1,800 for travel
• $1,800 for car expenses
• $900 for home repairs
• $900 for medical costs
• $600 for electronics

If you need to pay for something, you can use the funds from the appropriate sinking fund. And if you use only some of the money in a fund, you can continue contributing each month.

Suppose you decide to take a trip that costs $800 at the end of the year. You would spend $800, leaving $1,000 in the sinking fund. And you can keep adding money to it. The next time you want to travel, you’ll have a more significant amount in the sinking fund and can take a more expensive vacation.

You can also adjust how much you add to your sinking funds depending on your needs and how often you use them.

Using a Sinking Fund for Ongoing Expenses

A sinking fund isn’t for everyone. However, a sinking fund strategy can be a good option if you’re looking for a way to save for ongoing costs and want a manageable way to prioritize your objectives. It requires some patience to set up, but with discipline, a sinking fund can make your finances easier to manage.