Sinking Funds for Beginners – How To Save Money Effectively

Sinking Funds for Beginners – How To Save Money Effectively

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There are many hacks and tricks that will help you save money but nothing beats sinking funds.

Sinking funds are one of the best ways to start having real control over your money.

Do annual expenses and birthdays seem to creep up on you?

We used to feel the same too!

But we’ve turned the tables since utilising sinking funds in our money system.

Today we want to break down everything you need to know about sinking funds.

• What are they
• Why have them
• How to set them up

Plus, you’ll get a sneak peek into our sinking funds because we preach what we practice.

What Is A Sinking Fund?

We’ll start with an example to drive the point home.

Let’s say you and your friends have agreed to go on a trip in 3 months.

You plan to hire a lodge, have some good food and book excursions, cinema etc. 

The most important question is: How are you going to pay for it? 

Most people would pay for this using one of three things.

First, you use your debts such as your credit card or overdraft.

Secondly, you could dip into your savings such as your emergency fund or house savings.

Thirdly, you use your paycheck when the time comes and struggle the rest of the month until the next payday.

But, there is a better way! 

Sinking Funds for Beginners Explained

A sinking fund is money you save today for a planned and expected future expense. 

We’ve used the example of a trip but sinking funds can be used for anything.

From bills and annual expenses to special occasions and planned purchases.

The truth is, we all have things going on in life. 

And sinking funds are a great way to ensure you have the money to pay for these things.

Benefits of Sinking Funds

There are many benefits that sinking funds have brought into our lives.

Here are three of the main benefits that we’ve enjoyed ever since starting.

More Control Of Your Money

Sinking funds enable you to start thinking ahead financially.

The essence of saving in advance for a future expense means you’re taking control of your bills.

You no longer allow yourself to be caught off guard when the annual bill turns up.

Or, be borrowing money from loved ones so you can buy a Christmas gift for your child.

With sinking funds, you’ll already have the money available when the time comes. 

Empowers You To Stick To Your Budget And Money Goals

If you don’t have sinking funds you’ll mess up your budget.

You may end up paying an annual cost at the expense of you having money for groceries.

Or, you could keep dipping into your house or car savings to pay for things.

Sinking funds help you avoid having a tough month or delaying your money goals.

Financial Peace

If you have money saved in advance you won’t be anxious when the due date arrives.

For instance, you can enjoy your trip with no money worries waiting for you at home.

You can have a great time with your family at Christmas without worrying about money.

This is the power of sinking funds!

Sinking Funds vs Emergency Fund 

It’s easy to be confused about these two – we were too.

The difference between sinking funds and an emergency fund is WHEN you’ll use the money.

With sinking funds, you’re saving money for an EXPECTED expense.

An emergency fund is money saved for the UNEXPECTED emergencies that show up unannounced. 

Plus, you’d use your Emergency Fund to cover your bills if your source of income was impacted.

In reality, the two can be blurred. 

For example, you may have a car sinking fund for MOT or Service payments.

But if something happened to your car you may use that money to pay for repairs.

But we’d advise you to have both.

The sinking fund pays for the known costs like car insurance, servicing, MOT and road tax.

And your emergency fund pays for the unannounced repairs that come up.

How Do You Set Up Sinking Funds for Beginners?

1. List areas that you want to save for in advance
2. Calculate the total amount you need to save for each area
3. Decide how much to save based on affordability
4. Open specific accounts / pots / envelopes for each area
5. Start saving!

1. List Sinking Fund Areas

Create a list of areas in your life and budget that you could have a sinking fund for.

Here’s a list for some inspiration:

• House fund for new furnishings or renovation
• Car fund for MOT, Service or insurance
• Family fund for kids school expenses or childcare
• Special Occasion funds like Christmas, birthdays or anniversaries
• Annual bills like insurances, council tax and yearly service charge

There are plenty of options for you to save and start your sinking funds journey.

2. Calculate Amount To Save

This is the amount you expect to spend for each area on your list.

For insurances, you can get quotes with the annual price for these to give you an idea.

We like to add on about 10% more in case prices increase by the time our bill is due. 

And use that as the total amount to save.

For non-bills like special occasions or trips, decide how much you’d want to put towards them.

You could decide to put aside £300 for Christmas and £150 for your son’s upcoming birthday. 

The power is in your hands with sinking funds.

3. Monthly Saving Commitment

Assess your budget and define how much you can afford to save towards sinking funds.

Divide the total amount required by the number of weeks or months left.

Here’s an example if you’re planning to save monthly.

The monthly amounts give you an understanding of what you’d need to save.

Now assess that against the amount you can afford to save based on your budget.

If you can’t afford all of it, choose your priorities and start with those.

You don’t have to start ALL sinking funds today. 

But at least pick one to start with.

4.Open Specific Sinking Funds Accounts

We are in favour of having specific accounts for specific uses. 

We have an account for each fund type (more on this later).

By having an account for each fund type you avoid confusion about the money in there.

However, if you opt for one account then track your deposits on a spreadsheet or Notebook.

If you prefer, you can keep cash in separate envelopes/wallets.

5. Start Saving

As simple as that. 

Just start!

We’d advocate that you set up automatic transfers to the sinking fund accounts.

If you prefer, you can manually transfer your money on payday.

Then, keep saving until you reach your target

Don’t feel the pressure to try everything at once. 

Start off with one sinking fund at a time.

This is a lifelong journey of continuously saving for your upcoming expenses.

Our Sinking Funds

We have the following sinking funds.

To learn about how we manage our sinking funds, watch our video or listen to our podcast.

Take Action

Check out our Ultimate Money Plan to get in control of your money and smash your financial goals.

Share this post with others so they can also learn about sinking funds for beginners too.

Let us know how you’re getting along by getting in touch with us, we’d love to hear from you.

Knowledge is powerless without action.

So take action, and take care.

Thando & Lindie