There are plenty of smart ways to save money. One of the most underutilized ways is with the help of a sinking fund. With a little bit of forethought, you can save money in the best way possible. With a sinking fund, sticking to a budget becomes a whole lot easier.
Sinking funds go beyond the ‘set it and forget it’ use of a traditional savings account. You have to strategize in order to get the most out of a sinking fund. And unlike a savings account, there is an intention beyond stashing money away until the number gets bigger. If a savings account is checkers, then a sinking fund is chess.
Why It Matters
A sinking fund adds an end goal to putting money in an account. Instead of just saving money to save, a sinking fund gives you an actual endgame. The money you set aside is predetermined, and the goal can be as reasonable as your finances allow. You can also use a sinking fund to avoid layaway fees and make a big purchase.
Is A Savings Account Better?
A savings account has a singular purpose – save money. In many cases, you have probably set it up as a sinking fund without realizing it. An emergency fund is more of a sinking fund than it is a savings account. The big difference between the accounts is how one forces you to think about money. When there is an achievement to be earned, saving money doesn’t feel like an absolute grind. In the end, a sinking fund can help you develop a lot of important financial habits.
Best Use Scenarios
If you want more of a ‘targeted’ savings, then sinking funds is your best choice. This includes planning for expenses, large purchases, trips and events. If you already use your savings account as an emergency bailout, then it is considered a sinking fund. That would fall under unexpected expenses that often occur when you least expect it. A sinking fund can also be a lifesaver when your insurance denies to cover its portion of a bill.
Are Sinking Funds Complicated?
The complexity of a sinking fund comes down to your willingness to make plans. It can be as simple or as complicated as you need. Once you prioritize the target, settle on an amount that is needed to meet that goal. It can be equal or irregular deposits based on how much you want to interact with the account.
Finding a way to make side money is a great way to take some of the burden off of your paycheck. You can run multiple sinking funds with careful planning. But just like a regular savings account, it would defeat the purpose if you’re cash strapped after each deposit.
Optimizing your budget is the only way to make your financial dreams come true. When you use a sinking fund, it becomes a priority for intelligent saving. Start the journey early and to see the benefits of your hard work.