Why You Should Start Using Sinking Funds Today

Impulse buying can be the end to all financial plans. Accounts are most likely overdrawn by the end of the month or purchase decisions are regretted. This is the reason for a sinking fund for all planned or major purchases. Sinking funds are simply savings put in one particular place for a specific thing. For example, car tags; each year a car owner must pay the tax on the registration. Each year the tags and taxes are about the same price. Allocating savings each month until the next year saves panic when that time comes. Sinking funds are a great way to never be in need of money for a must have purchase.

Photo by HowardLake via Flickr

Sinking Funds Can Save You Money

Start a sinking fund for an item that you want instead of succumbing to impulse buy is a great way to save money. For example, instead of buying a camera on impulse, you start a camera sinking fund. Later, you may find that the camera you wanted a few months ago (as an impulse buy) is not the camera that you want now — e.g., there is a better camera for a cheaper price. Even if you still want the same camera, you may find that it is now on sale and there is money left over from the camera sinking fund to spend or save at a later time. Here are some sinking funds ideas: car repairs, home improvement, vacation, Christmas and other gifts, emergency funds, and maybe even a “blow money” fund. Blow money can be used for whatever may come about.

Sinking Funds Is Not New and It Works

Sinking funds have been around for decades. One hundred years ago, cities’ entire budgets were run off of sinking funds. Some states still have these funds, called “rainy day funds“. In a time of financial crisis such as a recession or depression, these governments may use these funds to help ease the expenses of every day government, or use it to keep government employees paid.

It is time to go back to an older way of thinking about money, time to follow the examples of our forefathers and stop living off of credit. Our irresponsible borrowing and lending has put this entire nation at risk of another depression. If more people followed these examples, more people would be better financially prepared to weather financial emergencies.

Where To Keep Your Sinking Funds Money

Once you begin to save for these funds, you must decide where you are going to keep these funds. Some cash funds can be categorized in envelopes and kept in a safe or a safety deposit box while other larger funds can be placed into allocated savings plans. One idea is to find a good online bank where you can set up several savings accounts, specified for different funds with no minimum requirements. Starting early enough, no purchase will be unplanned and there will never be panic for unavailable funds.

Start Using Sinking Funds Today

Lets all follow the examples of the past, before there were 401(k)’s and banks that would lend money for anything while charging 30% interest. Freeze your credit cards or cut them up if you have to. Buy a safe and start paying with cash. Save more and buy less. Never allow another financial crisis to put you further into debt. Start using sinking funds today.

About the Author

By , on May 20, 2009
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the owner and publisher of WorkSaveLive.com.

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Leave Your Comment (4 Comments)

  1. Melissa says:

    Hi, I’ve been reading your website for a while, first time to comment.

    We have been using a sinking fund for years although this is the first time I’ve thought of calling it that, but of course that’s what it’s called!

    Keeping you money in a high interest savings account is great to boost your fund while saving for your expenses. Beware of bank fees if you have multiple accounts though. We keep our sinking fund in one account, but I “allocate” the money in a spreadsheet for each expense category to keep track of my savings progress and this is linked to our budget so I know how much I have to save for each expense.

  2. Rajeev Singh says:

    Sinking fund is similar in a way to the “depreciation fund” which large corporates maintain in order to replace their high ticket items like machine tools etc. It is an important concept in accounting and it does work. Sinking funds work on this principle only with few more benefits thrown in. Good idea to have one.

  3. My Journey says:

    My Wife and I do this, and we LOVE IT! We have tons of ING accounts already named for their purpose. We have a vacation fund that gets 20 bucks a week, a wedding gift fund that gets 20 bucks a week, etc.

    I recommend it to everyone, yet few listen lol

  4. Money Beagle says:

    I have been doing this for quite some time. I call them ‘earmarks’ or ‘written off funds’ because I’ve already dedicated them for spending. But, I have multiple categories that I tweak occasionally, for things like utilities, car tags and roadside assistance funds, gifts, utilities, and multiple others. I just added a ‘spring flower’ fund that I’ll start adding to next month so that I don’t have sticker shock at the nursery next year like I did yesterday when we bought our flowers and plantings for the year!

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