What is a Sinking Fund, and How to Open Up One

I am not a financial professional & this is not financial advice, investment advice, or tax advice. The information provided here is for informational and recreational purposes only. Do your own due diligence before making financial decisions!

If you’re looking to save money, you’ve probably heard of the term “sinking fund.” But what exactly is it? A sinking fund is a type of savings account where you set aside money to cover future costs or expenses. By setting money aside in a sinking fund, you can avoid taking on debt when those expenses arise. Let’s look into how sinking funds work and why they are so important.

What Are Sinking Funds Used For?

Sinking funds are usually used for large one-off purchases or expenses that don’t occur regularly, such as vacations, home repairs, or car repairs. They can also be used to pay for regular expenses that have varying costs from month to month, such as utility bills or property taxes. In short, anything that requires a lump sum payment can be paid for with money from your sinking fund.

The Advantages of Sinking Funds

Using a sinking fund has several advantages over saving or financing large purchases. One advantage is that since the money has already been set aside for the purchase or expense in advance, it eliminates the need to take out loans or use credit cards. This means that you won’t incur any interest payments or late fees if something unexpected comes up and you don’t have enough cash to cover the purchase or expense. Additionally, having a designated savings account can help prevent you from spending your money on non-essential items and make sure it’s available when you need it most.

How To Set Up A Sinking Fund

Setting up a sinking fund is easy! All you need to do is open a high-yield savings account. I recommend a Capital One 360 Savings Account for your sinking funds. They currently pay a 3.4% interest rate in their Performance Savings Accounts.

Once the account has been opened and funded with your initial deposit, start making regular contributions to the account each month so that it grows over time and will be ready when needed. Also, consider automating your deposits so that they happen automatically each month without requiring any extra effort on your part!

Sinking Fund Example 

Let’s say your goal is to save $1,200 for property taxes due at the beginning of each year. To reach that goal with a sinking fund, you would need to contribute $100 each month for 12 months. That comes out to a total of $1,200!

Other scenarios where a sinking fund is helpful include saving for a vacation, holiday gifts, birthdays, yearly subscriptions, medical expenses, or an emergency fund.

I currently have the following sinking funds: 

• Medical Expenses Fund
• Christmas Fund
• Vacation Fund 
• Life Insurance Fund
• House Emergency Fund 
• Car Registration Fund 
• Amazon Prime Fund
• New Car Fund 

Final Thoughts

Sinking funds are an excellent way for anyone looking to save up for big purchases or expenses without taking on debt. Since they require setting aside only small amounts at regular intervals, they are easy to maintain and won’t require too much effort on your part either! So if you’re looking for an efficient way to save up without breaking the bank—consider setting up a sinking fund today!

Your Elevated Life and Money Plan by Nakeshia