Sick Of Going Over Budget? Here’s Why You Need A Sinking Fund

Have you ever experienced a big expense in your life where you thought “ugh I wish I had money put aside for that”?

Maybe it’s a home repair, car down payment or maybe it’s for that long overdue vacation (#precorona). 

Having a sinking fund lets you prepare for this. 

What’s a Sinking Fund? ⚓️

You’ve probably heard of ‘sinking fund’ if you live in a condo, apartment or flat – these are recurring costs like cleaning services, security, utility bills and lift servicing costs. Owners contribute to the building’s sinking fund to cover costs should major works be needed. 

The term ‘sinking fund’ has been recycled to apply to your personal finances — a strategic way of putting aside money (either weekly, biweekly or monthly) for specific expenses that will come up in the future.

Examples of sinking funds:

🚘  Buying a new car

🛠 General repairs for house

🐱 Budgeting for yearly pet vaccinations

🏝 Saving for a vacation 

🎁 Budgeting for Christmas gifts

📚 Back-to-school items

You can create a sinking fund for any financial goal. You can also have as many to suit your goals, but most sinking funds fall in these 3 categories: 

1.Large purchases – new car, downpayment for house

2.Overlooked expenses – taxes, annual insurance or clothes for growing kids

3.Expected ‘unexpected’ events – new tires, replacing old laptop

When you have a sinking fund, you avoid having to go into debt once that expense pops up. And no matter how much credit card companies try to ‘sexify’ using one, trust us, PLANNING your finances is sooo much more stimulating 🔥

Sinking Fund vs Emergency Fund 🥊

An emergency fund is for unplanned expenses like your car breaking down, getting into an accident or suddenly losing your job. You should have at least 3-6 months’ of expenses saved for any possible emergency.

A sinking fund is separate from your emergency fund. It is for planned or generally expected expenses – you know what the money is for and roughly when it needs to be used.

How To Create A Sinking Fund

Here’s a step-by-step on how to create your first sinking fund. Keep in mind that personal finance is PERSONAL – if you have another way to start your fund, try it out yourself! It may work for you better than any other methods. 

STEP 1: Decide what you’re saving up for. 

Bali Fund for when all this pandemic madness is over? Home Gym Fund for equipment you’ve been eyeing? The first step is to get specific about what your sinking fund is for. 

STEP 2: Decide where to stash it. 

You can open up a new savings account for your sinking fund – make sure there is no minimum balance required for the account.

You can even keep it lo-fi – some people even just keep the money in envelopes for sinking funds with smaller amounts. Find a method that you’ll stick to.

STEP 3: Decide the amount.

Say you want to save RM 1,500 for this year’s Christmas gifts. Break that up into smaller, achievable amounts. That’s RM 1,500 / 12 months = RM 125 a month, or RM 31.25 a week. 

In reality it adds up to the same amount, but breaking it down over a planned amount of time makes it more manageable. Plus, having a sinking fund means you don’t resort to using your credit card when Christmas rolls around, and realising you don’t have money set aside for presents. 

STEP 4: Foolproof your savings!

The best way to consistently ensure you put money into your sinking fund is by automating your savings. You can do this by setting up a direct debit through your bank, or create a Pod savings account for easy savings automation. That way, you set it up once, forget about it then be pleasantly surprised when you check your fund to see the money that’s growing there. Yay!

A little strategic planning goes a long way. Creating sinking funds prevents stress AND avoids having to go into debt. Have you started your own sinking fund?