Accomplishing anything is easier with specific goals. Whether you’re training to run a marathon, learning a new programming language or trying to advance in your career, you’ll make faster progress if you have a clear vision of where all that hard work is taking you.
The same is true for saving. While you certainly could stash all your money in one big pot and distribute it as you see fit, that’s an easy way to leave certain goals unfulfilled. This approach also makes it easier to spend your savings on discretionary purchases, because you don’t have a clear picture of what you’re sacrificing.
Enter the sinking fund, the best way to organize your savings into specific and discernible groups, allowing you to focus on each goal individually. Here’s why you need one – and how to start it.
What is a Sinking Fund?
A sinking fund is a special savings fund for a long or short-term goal. People set up sinking funds for vacations, Christmas presents, a down payment on a house or any other goal where funding is needed.
A sinking fund may have a firm end date or no specific timetable. If you need to buy your boyfriend a birthday present, that’s an example of a sinking fund with a clear deadline. If you’re saving for car repairs, the timetable can be open ended.
Having a sinking fund in place will prevent you from dipping into your emergency fund, charging a credit card or using student loan money. It can help you avoid borrowing money from your parents or taking out a high-risk payday loan.
How to Start a Sinking Fund
A sinking fund should be stored in a savings account, ideally earning an interest rate between 1.5 and 2%. Because many sinking funds have a long time frame, it’s best to earn as much interest as possible. Check the interest rate before opening a savings account.
Keep the sinking fund separate from your everyday checking account so you’re not tempted to raid it for something else. It should also be separate from your emergency fund, which should only be used for events you can’t plan for like a visit to urgent care or a sick pet.
Some people have multiple savings accounts for different sinking funds. You may decide to save for a vacation, a new laptop and textbooks for next semester. Instead of saving for all three goals in one savings account, you can create a separate account for each sinking fund.
Online banks are often the perfect place to store a sinking fund. They usually have the best interest rates on the market and make it easy to open multiple savings accounts.
Some banks let you give each savings account a separate name. If you’re stashing money away for a new bike, you can call the savings account “New bike.” I have about 10 different sinking funds at the moment, and naming each account after the goal it’s tied to helps me stay motivated to keep making deposits.
How to Establish a Sinking Fund Goal
Before you open a savings account for a sinking fund, decide how much money you need for your goal. If the goal has a specific end date, work backwards to determine how much to save. For example, if you want to travel to Mexico for spring break, find out how much you need for the trip. Then, look at how many months you have left to save. Divide the total amount by the number of months remaining to figure out how much you’ll need to save.
Next, look at your budget and monthly expenses to see how much you can allocate. Use the Mint app to see how much money is left over each month. If there’s enough left to meet your desired saving rate, congratulations – your work is done.
But most people will realize there’s a discrepancy between how much they earn and how much they need to save. If that’s the case, there are two solutions: cut expenses or make more money.
Cutting expenses can be difficult, but it helps to remember why you’re doing it. If it’s for spring break travel, think about how much fun hanging out with your friends will be. If it’s for a new laptop, think about how slow and annoying your current one is.
When I wanted to take a two-week trip to Europe, I cut back on eating at restaurants for a semester. I hated saying no to my friends, but planning for my trip kept me motivated.
How to Start Saving
If you don’t have a part-time job or side hustle, now might be the time to start. When I was in college, I got a part-time job working at my dorm’s front desk to save for a study abroad trip.
I had to work Sunday mornings, and I hated getting up early while all my friends slept in. But I wanted to study abroad in London, and I needed the money to pay for it. That was usually motivation enough to get me out of bed. Usually.
Think about any jobs or side hustles you can start. Monetize any skills or talents you have, like web development, graphic design or crafting. Ask professors or your advisor if there any on-campus jobs available. You can also look into picking up more hours at your current job, or asking your boss for a raise or promotion.
Put any extra windfalls toward the sinking fund. If you get a tax refund or birthday check from Grandma, add it to the sinking fund instead of spending it. This is the easiest way to make significant progress towards your goals, because depositing an unexpected windfall doesn’t require you to do extra work or sacrifice money you’ve already budgeted elsewhere.
Once you start making more money, set up automatic transfers from your checking account to the sinking fund. Automatic transfers take just a few minutes to set up and are easier than remembering to transfer money every month.
What do you need to set up a sinking fund for? Let us know in the comments!
Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins.
Written by Zina Kumok.
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