How to Use Sinking Funds to Reach Your Financial Goals
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What is a Sinking Fund?
I’ve just recently become familiar with the term “sinking fund,” but I’ve been using this method for saving for our financial goals for some time now. What is a sinking fund, you ask? Basically, a sinking fund is a savings account that you fund each time you get paid. This savings account can be an actual savings account at your bank or a cash envelope. I like to fund my sinking funds electronically with my Capital One 360 savings account.
How to Use Sinking Funds to Reach Financial Goals
Using sinking funds is my favorite way to save money, and since I do it electronically, I can “set it and forget it.” What I mean by that is I have multiple savings accounts, and I have set each of them to automatically withdraw from our checking account each Friday when my husband gets paid.
For example, we have $35 dollars deposited into our Christmas sinking fund every Friday. I don’t have to physically do it, so it saves me time, and it kind of forces me to do it when maybe I don’t want to one week. This doesn’t mean that once you set up your sinking fund that it’s permanent; you can change your preferences as many times as you want, but this once-a-week auto deposit works best for us.
What Types of Sinking Funds Do I Need?
The types of sinking funds you need are completely dependent on your own personal needs/wants. Some examples of sinking funds you may want to consider are:
car or homeowners insurance if paying annually
How to Set Up Your Sinking Funds
Determine Your Categories
The first thing you want to do is determine which categories you need. For my example, I’m going to use Christmas, vacation, and clothing. Then you’ll need to open a savings account for each category. Capital One makes this really easy.
Determine Your Budget
The next thing you want to do is determine how much money you want to save for each category. For our Christmas fund, we determined we wanted to have around $1800 for Christmas. I know this is a lot, but we don’t spoil our kids throughout the year and like for them to have a big Christmas. Plus, we have a LOT of people we want to buy for. Your amounts will be determined by your personal needs and budget. Let’s say we also want to save $300 a year for clothing, and in two years we want to take a big vacation to Disney, so we’ll say $5000 for the vacation fund.
Determine Your Weekly Savings
Next, divide your total amounts by the number of paychecks in the time period you’re saving for. So for us, we divide our Christmas and clothing funds by 52 since there are 52 weeks in a year and we are paid weekly. For our vacation fund, we will divide by 104 since our goal is two years out. So our total savings for each category weekly is:
Christmas - $34.61 (I round up to $35)
Clothing - $5.76 (I round up to $6)
Vacation - $48.07 (I round up to $50)
That brings us to a total of $91 a week deposited into our sinking funds.
The Bank I Use for Sinking Funds
I chose Capital One 360 Savings simply for ease of use. You can have up to 28 savings accounts with them, so using them for sinking funds is perfect. Plus, it gains a little interest, 1% to be exact, and there is no annual fee. Every little bit helps, right? You can set up your transactions automatically from your checking account at your current bank, transfer from your savings account to your checking account when you need the money, and you can even transfer between savings accounts, all for free. You also get detailed transaction history when you log in, and you can change your amounts and frequency at any time.
I made a Sinking Fund Tracker you can use if you like to keep track of your accounts manually or if you use the cash envelope method. If you’re a member of the Mom For More community, just log in to the free resource library and download the printable PDF. If you’re not a member and would like to be, just subscribe below, and I’ll email you the password to the library ASAP.
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Setting up your sinking funds is so easy, and once you do it once, you’re done until the end of the period you selected. Using this savings method is my absolute favorite! Do you have sinking funds? How has it helped you reach your financial goals? Tell me about it in the comments below!
Until next week,
I’m Kari, founder of Mom For More. Do you often lie awake at night dreaming about what it would be like if your family was debt-free? What if you could make that dream come true with a business that allowed you to stay home and be fully present with your babies? Mom for More teaches moms that they can start a home business, become debt-free, and gain more overall peace in motherhood. It equips moms with the tools they need to succeed in their finances, home businesses, and daily lives. You don't have to put your life on hold when you become a mother. It's okay to dream. It's okay to believe that you were made for more. I’d love for you to subscribe and follow along with me!