If you have been getting started on budgeting, you have probably heard the term sinking fund. But what exactly is a sinking fund and do you need to have them? Well, I will go into that a little bit here and basically, yes you should have them.
A sinking fund is essentially a fund or savings account of money that has a purpose. Let’s take Christmas for example. Instead of rushing to find money to spend on Christmas at the end of the year, why not put a little bit of money into a savings account or a specific envelope each month throughout the year and take money from that when the time comes. This prevents panic when the time comes that you need money for the sinking fund purpose.
Other good sinking fund reasons:
- Auto Insurance (you will typically get a discount if you pay yearly, so why not save up to pay it?)
- Auto License and Registration. In my state we do this every two years and it isn’t cheap. It’s nice to have it paid for in advance.
- Home Repairs. If you own your own home, it is best to keep a sinking fund for home repairs as these often come up.
- Birthdays and anniversaries. Both of these come up every year. Make sure they don’t throw your budget for a loop.
- Car Maintenance. New tires, oil changes, etc. Cars require maintenance to run their best.
- Christmas. We discussed this earlier, but it worth noting again. Christmas can be expensive. You may as well prepare for it.
With sinking funds you will be much more at ease knowing that you aren’t going to be out of luck when a special occasion comes around or when something breaks.
