How to Use Sinking Funds for Large Expenses

July 2nd, 2023

Life throws curveballs. We all know it. Sometimes those curveballs hit us hard, demanding a significant chunk of money suddenly – a surprise repair bill, a necessary home renovation, or even a sizable medical expense. The immediate reaction is often panic, and the urge to raid your everyday savings. But what if there was a calmer, more strategic way to tackle these large expenses?

Enter the sinking fund.

What is a Sinking Fund?

Simply put, a sinking fund is a dedicated savings account specifically earmarked for predictable, large expenses. Think of it like a little “bucket” you consistently fill up with money set aside for specific future needs. It's a far cry from the haphazard approach of dipping into your main savings account when an emergency arises.

Why Use a Sinking Fund?

Reduces Financial Stress: Knowing you have a plan in place for these expenses eliminates the anxiety and scrambling that often accompanies unexpected costs.
Controlled Funding: You're in charge of the rate at which the fund grows, allowing you to avoid rapid, potentially unwise withdrawals from your core savings.
Disciplined Saving: The act of regularly contributing to the fund builds a valuable saving habit.
Strategic Investment Potential: Depending on the timeframe of the expense, you can potentially invest the funds to earn a return.

How to Set Up and Use a Sinking Fund:

Identify Your Large Expenses: Start by listing out the major expenses you anticipate needing funds for – a new appliance, car maintenance, home repairs, etc. Be realistic about the timing and costs.
Estimate the Cost: Research the approximate cost of each expense. It's better to overestimate slightly than underestimate.
Calculate Regular Contributions: Divide the total cost of each expense by the number of months (or weeks, if appropriate) you have to save. This will determine your regular contribution amount. For example, if a new roof costs $10,000 and you have 12 months to save, you’d need to save$ 833.33 per month.
Open a Separate Account: Open a dedicated savings account specifically for your sinking fund. Look for a high-yield savings account to maximize interest earned.
Automate Your Savings: Set up automatic transfers from your checking account to your sinking fund account each month. This makes saving effortless and consistent.
Review and Adjust: Periodically review your sinking fund’s progress and adjust your contributions if your anticipated expenses change.

Don’t just survive the unexpected – prepare for it! A sinking fund offers a powerful tool for building financial resilience and giving you the peace of mind knowing you’re ready when a big expense comes calling.