When you have a planned upcoming expense like a vacation, major appliance purchase, school shopping or yearly insurance payment you can use a sinking fund to pay for those expense in full.

What Is a Sinking Fund?
A sinking fund is a dedicated part of your budget used to save money for an upcoming expense by saving a portion of your income each month.

How it Works

You determine what it is you need to save for and how much you need to save. Divide the amount needed by the number of months you have before you’ll need the money. That’s the amount you need to save each month to make the payment in full. You want to put the money in a high-yield savings or money market account that is easily accessible. Setup an automatic transfer so that each time you get paid the decided amount is automatically transferred to your sinking fund account.

How it Helps

A sinking fund removes stress because you don’t need to worry about how you will pay for a planned expense, you know the money will be there when you are ready to use it. It also prevents you from going into debt to pay for it.

Ideally, before you create sinking funds for planned expenses, you should have other debt under control and an emergency fund in place to pay for unplanned expenses or loss of income.

Sinking funds are a great way to save for future purchases, they ease the burden that can come with a large upcoming expense. Peace comes from knowing the money will be there when you are ready to use it.