Sinking Funds for Beginners: Meaning, How to Set Up and Manage

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 sticking to a 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, funding a 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 for your sinking fund

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 your sinking 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.

Managing Sinking Funds

Managing your sinking funds doesn’t have to be complicated or time-consuming! Using a money management app such as HyperJar can help you separate your sinking fund money into pots to ensure you are on track with your financial goals.

When you have opened your account, the next thing to learn is how to manage sinking funds. This is where categories come in. HyperJar can help customers create sinking fund categories by using Hyperjar’s saving pots.

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.

Sinking Fund Categories

There are many sinking fund categories to choose from check out our examples of sinking funds below!

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 one of the biggest unexpected expenses , 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 everything from 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 renovate or replace your old furniture.

6. Christmas

Christmas happens on the same day each year, but still, some people are unprepared for it. Set up a sinking fund to save up for Christmas expenses; the whole season will feel much less stressful.

7. Gifts

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.

9. Holiday

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.

10. Crowdfunding

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.

12. Philanthropy

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.

14. Other

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 in categories, 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.

How to use the HyperJar app to set up sinking funds?

Download the HyperJar app from the Apple App Store or Google Play Store. Create an account if you don't have one already
Create Jars in the app for whichever sinking fund categories
Tap the plus button on the Home screen
Name your Jar, pick a colour and a saving goal
Add money to the Jar from the Payments tab
You can automatically top up your sinking fund by scheduling a payment in the Payments tab

A sinking fund is a great way to save for something specific without compromising your savings or emergency fund. With HyperJar prepaid cards, jars, and rewards, you’ll be a savvy spender in no time.

Frequently asked questions about sinkings funds

What is a sinking fund in simple terms?

A sinking fund is like a separate bank account that you save money in so that you can buy something bigger or special like a car, holiday or an engagement ring.