I want to talk to you about what is a Sinking Fund, how to use them, and how they can be beneficial to you. I’ll also share with you what my Sinking Funds are for 2021.
For those who haven’t heard about this term, I usually refer to them as saving pots; little pots of savings for particular things I’m saving for each month or year.
Some people like to save money, while some people love to spend money. We all have different aims in life. Put simply, a Sinking Fund is pots of money you save throughout each year, so that you can then spend it on what is important for you. This could be clearing a long term debt or a specific purchase. In the end it really gives you a good feeling. We will elaborate upon this later in this article.
A traditional Sinking Fund, for example, could be to save for a wedding. It costs thousands and thousands but on my wedding we saved nearly £12,000. I spent it on the most incredible honeymoon around the world, for almost six months. Secondly, you can save for Holidays, Birthdays, Taxes (if you are self-employed), Christmas or a honeymoon etc., there are so many different Sinking Funds. It may also depend on your age and is flexible so you can change what you want to do each year. These are the examples of the traditional ones, but as it is personal finance, it is different for everybody.
So the question is, what is a Sinking Fund? For me it is a savings fund and enjoy seeing these saving pots add up that allows me guilt-free spending. I will also explain how this fund is different from your emergency fund or your savings later on. But it gives you a peace of mind and keeps a check on your finances as well and stops you from dipping into your emergency fund.
Now we will discuss how you will do your own Sinking Fund. I would suggest jotting down the things which are important and then see which needs priority. If going on a holiday is on the top, I will put the maximum amount of money in that. This will give you an idea how much to save for each sinking fund. This will all depend on the deadlines, the priorities, like a new car or an upcoming wedding a couple of years away and how much you can put aside for them.
As I said before there is a difference between savings and Sinking Fund. For me my savings are to grow my wealth and a sinking fund is to spend for specific things, so it is not the same pot. In the same way it is different from an emergency fund which you keep aside for an emergency.
That said, sinking funds are going to change every year. You may have bought your house with one fund and now you may contemplate it. As I say this, these funds are very personal, so make your own. I have nine sinking funds and I save in different types of ways.
My number one at the moment is a family holiday, which I remember speaking about in a video last year. After the pandemic last year, we are planning on a resort holiday we have never done before. It will be guilt-free as I have been saving for it. Then my big tenth wedding anniversary is this year and we would love to go and celebrate that. I also need a new computer and Christmas is coming up so these ideas may be helpful.
Finally, for me, treats are something important. Like a new candle (one of my favourite things!), a date night, holiday clothes. So, I save in my nine different pots each year and after that it is just guilt-free spending as you know you have money saved for that. So if you’re new to sinking funds, the key takeaway is to begin small as this will help with your financial responsibilities, but also meaning you can spend on things throughout the year guilt free, knowing you’ve saved and budgeted for them. You may find it difficult not to spend money when you have been doing it for ages as it is a habit and a new mindset to get into.
Do you have sinking funds?