If the White Whale be raised, it must be in a month
September 2, 2019
We denounce with righteous indignation and dislike men who are so beguiled and demo realized by the charms of pleasure of the moment, so blinded
One of the reasons it may look like your budget is not working is because you may not be covering all known expenses. What do I mean? There are months with big expenses which might be a strain on your income. That’s where sinking funds come into play.
So instead of wishing you did something earlier to cover that expense, with sinking funds you will be ready well beforehand
In this post, we will discuss everything you need to know about sinking funds – what it is, the why and how to create one. Thereby empowering your budget and making you ready for those expenses.
A sinking fund is a strategic way to save money towards a one time or irregular predetermined expense by setting aside small amounts over a period of time.
With sinking funds, you can save for anything you want, especially things you don’t want to pay for from a single month’s income E.g a new phone, dream vacation, wedding, birthdays, holidays, a new car, anything you want.
You can create a sinking fund for any goal which in essence means you are choosing to be intentional and proactive instead of defaulting to debt or your emergency fund
Sinking funds can be a very powerful tool in your personal finance arsenal
Imagine planning for your child’s 1st birthday and saving for that expense little by little within 10 months as opposed to putting a strain on your credit card or 1 or 2 month’s income
Sinking funds keep you out of debt, on budget, and on track to meet your financial goals.
The typical budget is designed to cater for monthly expenses but as we know there are one-off or annual expenses we need to handle, this is where sinking funds shine
You can save for any goal including fun things even if you don’t know the exact cost, that way at least you can cover some of the expenses
To be honest, I don’t know maybe because it’s related to the term Sunk cost (sunk cost is money that has already been spent and cannot be recovered) but it is a term sinking fund was first recorded to used by the British to settle national debt.
In modern times companies use it to gradually save up to pay off a debt or bond at a future date, and the rationale behind this is to soften the impact of repaying the full debt in future.
I have mentioned earlier that a sinking fund ensures you don’t dip into your emergency fund to pay for some expenses, so what is an emergency fund and how is it different
An emergency fund like the name suggests caters for unplanned and unknown expenses while sinking funds caters for planned or known future expenses
For example, your washing machine packs up and you have to pay £500 to replace it, it would be nice to have an emergency fund in place to make that happen because it wasn’t planned but to celebrate your child’s 1st birthday we can set up a sinking fund months before the date.
A savings account is very similar to sinking funds, I would even say sinking funds is a type of saving
The main difference is in its specificity, sinking funds are very specific meaning you can have an account for Christmas and another for a new car etc instead of just lumping everything into a savings account
This also means you can have multiple sinking funds
I believe that now you understand the principles and benefits of sinking funds and that’s the most important part because the question of how many will be different for everyone but here are some thoughts to guide you
I personally group mine into two, annual repetitive expenses such as subscriptions, insurance, holidays, birthdays, professional fees and one-off or large expenses
We denounce with righteous indignation and dislike men who are so beguiled and demo realized by the charms of pleasure of the moment, so blinded
We denounce with righteous indignation and dislike men who are so beguiled and demo realized by the charms of pleasure of the moment, so blinded
We denounce with righteous indignation and dislike men who are so beguiled and demo realized by the charms of pleasure of the moment, so blinded
This can be a starting point, which I subscribe to because I can’t imagine having a sinking fund for everything, I also choose to group them because I want to be flexible for example in my large expense/others sinking funds I can decide to forgo my new phone and add the money to my home renovation fund.
This method is also possible because I organise my list of goals on a spreadsheet with a target amount and date.
You can choose to take advantage of banking and budgeting apps like Monzo and Starling to save money in pots that act as sinking funds.
Here is how to create a sinking fund in four simple steps
In setting up the fund, I didn’t add up all costs and divide by 12, that’s because they all have different target dates and we want to be fully prepared not somewhat prepared.
The current culture and habit is tending towards buy now pay later, companies are making it very easy to spend and not just spend but get into debt while doing it.
You are responsible for your financial health while the companies are responsible for their increased profit, it’s ok to be selfish here do what’s best for your finances
Yes, you can buy that stuff and splurge, it’s as simple as sinking funds. Lol
Be intentional and proactive.
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