A sinking fund is a dedicated savings account where you set aside money for specific future expenses. Unlike a general emergency fund, sinking funds are used to save for planned costs, like vacations, home repairs, or holiday gifts, making large purchases easier to manage without debt.
How to Use a Sinking Fund
- Identify Your Expenses: List any upcoming expenses you want to plan for, such as car maintenance, medical bills, or annual insurance premiums.
- Set a Savings Goal: Determine how much money you’ll need and by when. For example, if you need $1,200 for a vacation in 12 months, you’ll save $100 per month.
- Create Separate Funds: Open a separate account or use labeled envelopes or budgeting apps to track each sinking fund.
- Contribute Regularly: Add small, consistent contributions to your sinking funds as part of your budget.
Sinking funds help you avoid financial stress and stay prepared for non-monthly expenses, ultimately keeping you out of debt.
