If you want to get started with sinking funds but don’t know where to start, you’re in the right place. This guide is designed for sinking fund beginners and will explain all the basics you need to know about how to create sinking funds.
In this guide, you'll discover what a sinking fund is, how to create a sinking fund, and how to get the most from having them:
What is a Sinking Fund?
A sinking fund is similar to a savings account but has a purpose of its own. They are separate from a savings account or emergency fund as they are set aside for one specific goal. People often create a sinking fund to save for a particular expense or one big-ticket purchase, such as a house deposit, a wedding, or a holiday.
Sinking funds can also reduce default risk as there are funds set aside, reducing the risk of missed payments or needing more debt. A sinking fund can mean the difference between staying on budget each month or having to reach for your credit card. They are a great way to save money; your savings account can still be growing while your sinking fund is too.
Sinking fund examples
There is no right or wrong way to do a sinking fund. You should understand your own goals and financial position before you create one. You can create a sinking fund for anything you like. Here are some examples of what a sinking fund can be used for:
· Vehicle costs – servicing, tyres, repairs, a new car
· Holiday – family holiday, honeymoon, gap year
· Wedding costs – dress, venue, invitations, photographer
· Home repairs – DIY, re-modelling, furniture
· Social events – birthday, Christmas, baby shower
How to Create a Sinking Fund
When you decide to create a sinking fund, you may wonder where to start. Here are some tips on how to get a sinking fund set up:
1. Have a financial goal
Sinking funds are the most effective when you have a goal in mind. You can use it for anything you like, but it’s essential to have a financial goal to help you to manage your sinking fund properly.
· How much do you need?
· When do you want to achieve this goal?
· Set a timeline
· Add milestones to keep motivated
· Automate your sinking fund contributions
2. Decide what savings account to use
You should open a separate account for your sinking fund, so you are not tempted to dip into it. When you deposit money into the account regularly, your sinking fund will grow without you noticing. You can also set up automatic payments from your main account into your sinking fund to make it even easier.
HyperJar’s Jars are a great option to manage your sinking funds. It’s easy to divide your money and transfer funds with a few clicks, and you can customise your jars to help visualise your goals.
3. Calculate how much savings you need
To create a sinking fund, you must decide how much money you need to save. When you know the amount, divide this by the number of months you have left to save. You’ll then know how much you need to budget for your sinking fund. For example, if you need £1,800 for a holiday, you will need to save £150.00 per month for 12 months. Adjust the time and amount to your needs.
4. Include your sinking fund in your budget
To manage your finances well, you should have a budget. You should include a sinking fund category when planning your monthly expenses and allocate an amount you can afford. A budget will help you stay on top of your finances, avoid debt, and help to manage your sinking fund.
5. Monitor the fund regularly
As with all your financial accounts, you should monitor your sinking fund regularly. You should review your funds monthly and make adjustments to reach your goal. If your financial circumstances change, you should revisit the sinking fund to ensure it’s still realistic. You need to be disciplined and stay on track. You should not dip into the sinking fund at all. This will delay your progress and make it take longer to reach your financial goals.
6. Celebrate when you reach your goal
Don’t forget to celebrate when you reach your goal! You’ve worked hard to earn and save that money, and now you’ve reached your goal – enjoy it! You could also add small rewards for yourself when you reach certain milestones, such as a takeaway coffee or a meal out with friends.
Sinking Fund Categories
When you have opened your account, the next thing to learn is how to manage sinking funds. This is where categories come in. There are many sinking fund categories to choose from.
HyperJar can help customers create sinking fund categories by using Hyperjar’s Jars. You can add multiple jars to your account and rename them whatever you want. We also offer the shared jars option so you can do a joint sinking fund with your partner, friends, or travel companion.
1. Savings account
You can use your sinking fund as an extra savings account for something very specific. Your sinking fund pays for something particular, so you don’t use your general savings or emergency fund for non-emergencies.
2. Medical expenses
Medical expenses can be unexpected, and they can add up quickly. If you have an ongoing condition, putting money aside in a sinking fund can help ease the financial pressure.
3. Family expenses
Family expenses include childcare and school fees to school trips and paying for their hobbies.
4. Treasury bills
Your sinking fund could be used for treasury bills which are liquid short-term investments provided by the government. Sinking funds reduce default risk as paying debt off early through a sinking fund saves interest and puts you in a better financial position.
5. Household expenses
Having a home means there is always something to pay for. Set up a sinking fund to keep any nasty repair bills at bay or save up to finally redecorate or replace your old furniture.
Christmas happens on the same day each year, but still, some people are unprepared for it. Set up a sinking fund to cover your Christmas expenses; the whole season will feel much less stressful.
Gifts can be unexpected such as baby showers or wedding gifts. A sinking fund can act as a gift fund throughout the year, so you don’t have to use your savings.
8. Mutual funds
Through a mutual fund, your money is pooled with other investors to invest in stocks and bonds. Investing is a great way to grow your wealth and boost your sinking fund further.
Many people use a sinking fund to save for a holiday. You can save with your travel companions to reach your goals faster with our shared savings jars.
Start crowdfunding with your sinking fund. You can use your saving to invest in businesses and start-ups or to donate to a project or venture.
11. Real estate investment trusts
Real estate investment trusts are generally good for people who want a long-term investment and can provide high dividends.
A sinking fund can be used to save money that you wish to donate to good causes. This can be when you reach a certain fundraising goal or donate after you’ve passed.
13. Private equity funds
You could invest your sinking fund via Private equity funds, an alternative investment type where investors purchase shares in privately held businesses.
These categories are a guide to help you understand how your money could be used. Your slinking fund can be used for anything. There are no wrong answers and when you reach your goal, keep saving. Set your next target and make adding to a sinking fund a habit.
The Benefits of Sinking Funds
From easing financial pressure to reducing debt, there are many benefits to sinking funds. When you set up a sinking fund, you can be well-prepared for your future and avoid the need to take on new debt or use your emergency funds. The benefits of sinking funds are:
· It helps you to organise your budget, so you know exactly where your money is going
· It can unlock doors to a new lifestyle as you grow your wealth and have more money to spend or invest
· You’ll have more opportunities to enjoy the income you have
· You will be more financially stable and have more flexibility and freedom
· Your overall mental state and financial well-being will be improved as money worries will be a thing of the past
A sinking fund is a great way to save for something specific without compromising your savings or emergency fund. With HyperJar cards, jars, and rewards, you’ll be a savvy spender in no time.