What Is a Sinking Fund and Why Have One?

What Is a Sinking Fund and Why Have One?

(MoneyHippo.com) – A sinking fund is a tool to save money over time for a big purchase in the future. You create a line item in your budget for the expense, like a vacation, car, or down payment on a house. You “sink” a bit of cash into the fund when you get paid. Eventually, the money accumulates, and before you know it, you’ll have the means to afford the planned item without experiencing a massive impact on your monthly financial obligations.

The first step in setting up a sinking fund is establishing a budget. Write down all income sources and total them. Then, record every expense you have, but don’t total them yet. Instead, consider and prioritize what significant future purchase you want to save for and include it as an expense. Figure out how much you want to save and break that number into small, manageable chunks. Commit to setting aside the amount each time you bring in a paycheck. That’s your sinking fund.

Sometimes, people set up a separate savings account for the purchase to prevent accidental spending from this line item which might undo all their progress. If you pursue this option, ask the bank if they can automatically move the dollar amount from your primary checking account to the sinking fund account to remove the possibility of spending accidents and temptations. You can let cash accumulate out of sight, if not out of mind, so it’ll be ready to help you make that big purchase when the time comes.

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