5 min read
Spruce
What is a sinking fund?
5 min read
Spruce
Staying on top of your budget by tracking purchases is a great money habit to help take control of your finances. But you might find that some expenses don’t fit seamlessly into your monthly budget. Take expenses like a smart phone, buying furniture, or equipment to start a new sport or hobby. They can be costly but may not fall into typical spending categories. So how should you plan for them?
This is where a sinking fund can come in handy. (The term is borrowed from economics and is a good thing despite its gloomy sounding name!) This strategy is a powerful savings tool to help you cover large, predictable expenses without throwing off your budget or tapping your emergency savings.
Spruce is here to help you set one up, providing a feature that lets you have two different saving goals. There’s also an option to transfer funds to your goals automatically each month.
Here’s a closer look at what a sinking fund is and the advantages it can offer.
Sinking fund definition
A sinking fund is a savings account dedicated to a specific planned expense. It’s a strategic way to set money aside each month so when the time comes to make the planned purchase, you already have the money available.
Let’s take a look at a sinking fund example. Say you’re planning a big vacation next year. (You deserve it!) Estimate the cost of the trip, including travel costs, food, and lodging. Divide that cost by the number of months between now and your trip. For example, if your trip will cost $1,200 and you have 8 months before you go, you’ll need to save $150 a month in your sinking fund account.
A sinking fund can help you save for other big items, like a down payment on a new car. It can also help with smaller purchases that may only take less time to save for, such as a new smartphone, laptop, or a new home appliance. You can even use a sinking fund to save for annual expenses like a child’s birthday party or holiday gifts.
Looking to make room in your budget for a sinking fund? Go through your budget item by item and look for places to trim expenses. Instead of dining out, you could hit up your mom for her famous enchiladas recipe and start cooking at home more. Did you sign up for an unlimited yoga membership at New Years, but you only go a couple times a month? You might free up cash to save in a sinking fund account by dropping your membership and paying for one class at a time.
Some of these changes may seem small, but you might be surprised how quickly they add up to meaningful savings. Need more ideas? Check out these money saving tips.
Sinking fund benefits
A sinking fund gives you a chance to examine and prepare for your spending in advance. That way you can avoid racking up charges on your credit card or dipping into your emergency fund to cover costs. Using credit cards less to cover costs can make it easier to pay off your bill in full each month. That helps you avoid big interest payments and build your credit score.
A sinking fund also can help smooth out your financial life. If you’re always preparing for expenses you know are on the horizon, you won’t have to make drastic cuts to your budget to afford your goals.
Sinking fund vs. emergency fund
Like sinking funds, emergency funds are dedicated savings accounts, but they have their differences too:
Emergency funds
Purpose: Emergency funds help you cover an unexpected expense, such as medical bills and home repairs, and they can replace income from a sudden job loss.
How much you should save: Most experts recommend starting with an emergency fund of $1,000 and then saving for a larger emergency to cover three to six months of expenses. That way, you’ll have an ample cash cushion that gives you time to get back on your feet if you get sick or lose your job.
Sinking funds
Purpose: Sinking funds help you save gradually for future big purchases.
How much you should save: The amount you save will depend on your financial goal and how much it will cost. It could be $120 for new shoes, or $8,000 for a down payment on a car.
Though each account serves a distinct purpose, both sinking funds and emergency funds are an important part of your overall financial picture. TL;DR, it’s a good idea to have both. And it’s important not to confuse them. Relaxing on the beach with an ice-cold bevy might seem like an emergency after a particularly tough week but remember to preserve your emergency fund for surprise expenses so it can help cover them without going into debt.
Consider prioritizing your emergency fund so you can avoid going into debt if you find yourself facing a financial hardship. Once your emergency fund is established, turn your attention to other financial goals. (That white sand beach vacation awaits you!)
How Spruce can help you set up a sinking fund
Ready to start a sinking fund and work toward your savings goals? Spruce is a mobile banking app that can help you build healthy money habits. With Spruce, you can set up two saving goals to designate however you like, making it easy to put a savings plan into action.
What’s more, Spruce lets you put your savings on autopilot by setting up automatic transfers to your goals. If auto transfers don’t work for you, you can always move money to your savings goals when it works best.
Explore other ways Spruce can help you be better with money
Creating a sinking fund is a great way to plan ahead, take control of your spending, and establish strong money management habits. With features like the Watchlist budget tracker and early access to incoming funds, Spruce can help support you along the way.
Get started with Spruce today!
This information provided for general educational purposes only. It is not intended as specific financial planning advice as everyone’s financial situation is different.
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