Many people always talk about the importance of saving money. But all of our reasons for saving are different. And there are a ton of varying saving strategies that can help you reach your savings goal. The best way to save money for many people has been through using the sinking fund method. A sinking fund can be used as part of your budgeting process to prepare for making large purchases. Let’s unpack all these topics.
Your Reasons for Saving
Of course, there’s the standalone importance of saving money for retirement, starting an emergency fund, or home. Covering these future expenses are for things that typically have a long time horizon. But what about those other yearly expenses that you want to save up for? Here are some examples of other things to consider saving money for:
- An anniversary, honeymoon, couples vacation, or family vacation
- A new appliance
- Cover car repairs
- Getting a new mattress
- New car
- New furniture for your home
- Home security system
- Updated windows
- New furnace
- Painting the house
- New phone
- New laptop or computer
- Camping gear
- New gaming system
- Power tools
- Paying for other hobbies or supplies that you need
As you can see, the list can encompass many different needs. It could be dealing with yearly expenses that you know are coming, like paying for a child’s daycare or future expenses for a replacement A/C unit that you are planning to need. You might start thinking about how to save money for the future after seeing those lists. Whatever is the case, write down why you want to save money and how much you will need. It will provide the right mindset for you to achieve the goal.
Don’t have something specific that you want to save up for? Don’t worry! Something will come up where you’ll be glad to have the additional funds to use. Call it your “big purchase” fund and use it when the opportunity arises.
What Is the Sinking Fund Method?
A sinking fund works like this: You save up a little bit each month for a certain period before spending it. You figure out how much to save by taking the total amount that is to be spent and dividing it by either the months or weeks to the purchase date.
It’s a pretty simple concept. For example, let’s say you want to up $3,000 for a Spain trip that you want to take in 6 months. Breaking that down, you will need to save $500 each month to get to your goal. This method is ideal for helping you prepare to spend on a significant purchase or bill. By saving up a little bit at a time, it avoids a scenario where your finances are overwhelmed when handling a purchase.
Why Should I Use This Method?
Life happens all the time. Unless you can predict the future, you will probably have an expense that comes up in the next few months. After a stressful work week, you might decide to treat yourself to a spa day. Your friends may decide to go on a girls’ trip for a weekend, or your son needs a new laptop to handle all the internet learning.
Without a sinking fund, you might have to make these purchases with a credit card, dip into your savings, or even worse, your emergency fund. Using this method, you can plan for big purchases and keep yourself on track with your other goals, such as paying off debt.
What’s the Difference Between a Sinking Fund and Savings Account?
When looking at how to save money for the future, there’s not much difference between a savings account and the sinking fund method. It’s about being intentional with what you are saving for—I.e., Saving for the trip to Spain, a new car, Christmas presents, etc. Lumping your sinking fund into a savings account where you store your emergency fund or all your extra money can blur those lines. Instead, get more deliberate and specific by setting up separate sinking funds for each saving goal.
How Is It Different From an Emergency Fund?
An emergency fund is very different from using a sinking fund. An emergency saving is intended to be money to be used for an unexpected expense. It’s recommended that you have saved up at least six months of expenses into an emergency fund in case you happen upon an emergency. It could be for if your heater breaks in the middle of winter, you lose your job suddenly, or your car breaks down unexpectedly. The intention of your sinking fund is known, on the other hand. That is why saving strategies can be different, depending on your priority.
How to Save Money for the Future
You can use various savings strategies, but we’re going to talk about using the sinking fund method here. The best way to save money is by being intentional in what you plan to achieve. Here’s how it use this method:
- Decide what savings goals you want to set each month. These could be across multiple different categories and have different time horizons.
- Break down how much you need to save each month to reach your expenitedue in the time-frame you want.
- Start putting away the predetermined amount each month/week to reach your goal.
The funds used in this method typically fall into these three categories:
- Big purchases – New car or vacation
- Overlooked expenses – Insurance on a home/car
- Unexpected events – Having to replace a TV or appliance
There are no hard and fast rules about what you should use these funds for. It does help to have some organizations, so consider creating different categories for funds. Here are some examples:
If you’re a homeowner, having a sinking fund for this category makes a lot of sense. At some point, you’ll have to fix something that’s damaged on your property. This expense isn’t necessarily something that insurance covers. Think about the broken garbage disposal, a heating system tune-up, or pool that won’t drain. If you know something in the home will need to be replaced sometime soon, estimate how much it will cost and how long you think it has before needing to be replaced.
There are two purposes of using a sinking fund for a vehicle: First, to use on the purchase of a new vehicle. The other reason is for repairs, maintenance, insurance premiums, etc. Are you planning to buy a new car in a year? If you want to save up $10,000 on a down payment, you could put away $833.33 each month. Owning a car can be expensive, and using this method can help control those expenses.
The nice thing about anticipating future furniture needs is that you usually know well ahead of time what you need. For instance, if you’re moving into a new home in a few months, you’ve probably thought about what furniture you want to purchase. Or if your dining table is needed to be replaced soon, you usually can hold off a few months to save up.
Use a Budget to Track Your Funds
Especially if you have multiple different funds, keeping track of how you’re doing on your savings goal can be challenging. Use a budget to have a pulse on your situation. It will also help identify areas in your life where you are overspending! There are several budgeting apps that you can try or use the standard paper and pen method to keep you on track.