There are all sorts of financial terms used in the finance industry to create the appearance of complexity. A sinking fund is one of those terms but it’s actually a very effective tool to use. For those of you unaware I am a finance professional. Now this blog isn’t a finance blog but from time to time I do financial posts for those with anxiety. Today we are going to quick post on sinking funds.
What is a sinking fund: A sinking fund is simply a strategic way to save money by setting aside a little bit each month.
It really is that simple. The key to the sinking fund is assigning the savings a purpose. As an example if you want to go to Ireland, or you want a new car, or you want a Great Dane. The sinking fund is a long term strategic effort to achieve that end.
So you’ve decided you want a Great Dane puppy, its $2,000 and you want it in 2 years. You now have the basis for a sinking fund, you are going to “sink” money into this fund until you hit the $2,000. Now the “fund” can be a simple savings account, an envelope in your dresser or a stack of cash under you mattress.
This isn’t an investment fund, and this is a key difference. Your goal isn’t to get interest, or get dividends or buy shares. Your goal is to get $2,000 in 24 months.
So you look at this weekly, monthly, annually however you want. Monthly you take $2,000/24=83.3 dollars per month. You then find this money in your current budget and begin to set it aside. Months go by the fund grows you get closer to your goal.
I know this all sounds simplistic, it is, until you actually have to do it. You see the hardest part of a sinking fund isn’t putting the money aside, its knowing the money is there. Something else will come up in the 24 months per the example above and you will be tempted to use this sinking fund to fix it. You can’t, the sinking fund has been assigned, and that is the trick.
Now the truly disciplined can use this principal for multiple long term objectives, like:
- Planning a wedding
- Saving for a down payment on a home
- Buying a car
- Elective surgery
Remember the Sinking fund has a designation for a singular planned event. That’s its great strength as that money is to be used for nothing else. I saved for my first vacation to Cancun Mexico this way, it took me 3 years a LONG TIME AGO. It worked, I was a broke 22 year old at the time, I had very little to my name but I had saved 4,000 by scraping every month for years. I started at $10 a week and every month put that money in a savings account. I adjusted the amount as I went but ALL OF IT went to the “Cancun Mexico Sinking Fund” and I went and had a blast.
If I can do it, so can you! Thanks for coming by and supporting my blog I really appreciate it!
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