• Home
No Result
View All Result
Money Monarch
  • Make Money
  • Money Management
  • Banking
  • Investing
  • Lifestyle
  • Real Estate
Money Monarch
  • Make Money
    • All
    • Make Money Apps
    • Make Money Online
    • Side Hustles
    • Work From Home
    68 Ways To Make Money Quickly In Multiple Sectors During 2020

    68 Ways To Make Money Quickly In Multiple Sectors During 2020

    23 Ideas For Kids And Teenagers To Make Money

    23 Ideas For Kids And Teenagers To Make Money

    I need money now

    23 Ways To Make Quick Cash When You Need Money Now

    make money driving for uber

    How To Make Extra Money Driving For Uber

    online jobs for teens

    13 Best Online Jobs For Teens To Make Real Money

    8 Places To Get Paid To Test Websites From Your Home Couch

    8 Places To Get Paid To Test Websites From Your Home Couch

    stay at home mother

    9 Best Stay At Home Mom Jobs To See Your Kids

    hobbies that make money

    16 Hobbies That Make You Money To Start Today

    create passive income with no money

    How to Create Passive Income With Zero Money

  • Banking
    • All
    • Certificates of Deposits
    • Checking Accounts
    • Savings Accounts
    Meet Credit Karma Savings – A New High Yield Savings Account With Even More Perks

    Meet Credit Karma Savings – A New High Yield Savings Account With Even More Perks

    woman writing about a money order

    How To Fill Out A Money Order Step by Step

    checkbook for checking account

    What Is A Checking Account?

    piggy bank savings account

    What Is A Savings Account And When Should You Use One?

    cd ladder money

    What Is A CD Ladder – Should You Get One?

    switch bank meeting

    How To Switch Banks Without Missing Any Payments

    what is direct deposit

    Direct Deposit – What Is It?

    Radius bank high yield account

    Radius Bank High Yield Savings Account Review: What You Should Know

    Checking Accounts Versus Savings Accounts: Similarities And Differences

    Checking Accounts Versus Savings Accounts: Similarities And Differences

  • Investing
    What Is A Bear Market?

    What Is A Bear Market?

    Stash App Review – What You Must Know Before Investing

    Stash App Review – What You Must Know Before Investing

    stock gift

    How to Give Kids A Share Of Stock (Christmas Gifts Or Other Holidays)

    Titan invest banner

    Titan Invest Review – Algorithm Investing Like A Hedge Fund

    thinking about betterment

    Betterment Review: Safe Investing With Robo Advisors?

    best short term investments

    8 Best Short Term Investments To Grow Your Money

    happy acorns review

    Acorns Review – Investing Spare Change With An App

    fundrise review apartment buildings

    Fundrise Review: Real Estate Crowdfunding Made Simple

    M1 Finance Review – The Greatest Way To Invest With “Pies”

    M1 Finance Review – The Greatest Way To Invest With “Pies”

  • Money Management
    68 Ways To Make Money Quickly In Multiple Sectors During 2020

    68 Ways To Make Money Quickly In Multiple Sectors During 2020

    Earny Review: The App That Monitors Price Matching And Price Drops

    Earny Review: The App That Monitors Price Matching And Price Drops

    What Is A Bear Market?

    What Is A Bear Market?

    12 Best Coupon Websites To Save The Most Money

    12 Best Coupon Websites To Save The Most Money

    Groupon Review – Online Discounts Without Clipping Coupons

    Groupon Review – Online Discounts Without Clipping Coupons

    filling up discounted gas

    16 Best Ways To Get Free Gas Cards and Discounted Gas

    how to get out of debt guide

    How to Get Out of Debt (Step By Step Guide 2020)

    Charlie Review – Text Message Budgeting Assistant

    Charlie Review – Text Message Budgeting Assistant

    on phone getting a personal loan

    How To Get A Personal Loan (Where To Look To Find One)

  • Real Estate
    buildium review

    Buildium Review – Is It Worth The Money?

    best property management software

    The Best Property Management Software (Ultimate Guide)

    13 Steps To Buy A House For The First Time

    13 Steps To Buy A House For The First Time

    3 Ways To Make 50K A Year Without Working (Using Passive Income)

    3 Ways To Make 50K A Year Without Working (Using Passive Income)

    how renters can save a house down payment

    7 Ways For Renters To Save For A Down Payment

    7 Ways For Renters To Save A Down Payment For A House

    7 Ways For Renters To Save A Down Payment For A House

No Result
View All Result
Money Monarch
No Result
View All Result
Home Money Management

What Is A Sinking Fund And Should I Have One?

Money Monarch by Money Monarch
January 1, 2020
in Money Management
0
This article may contain references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. For an explanation of our Advertising Policy, visit this page.
0
SHARES
169
VIEWS
Share on FacebookShare on Twitter

What Is A Sinking Fund?

Everybody has financial goals. Whether it’s buying a new car, putting the kids through college, or going on a lavish vacation, you need to set aside part of each paycheck with diligence if you want to reap the fruits of your labor.

But if you already have retirement funds, general savings, an emergency fund, and other investments, how do you save for these other goals?

Introducing the sinking fund.

Why Should You Have A Sinking Fund?

Essentially, sinking funds are dedicated savings accounts for specific goals. There are a ton of goals you can use a sinking fund for.

Because of this, you may want separate sinking funds for each goal you have. Doing so helps you separate your money and focus on each individual goal.

Common sinking fund expenses include

  • Cars
  • Vacations
  • Down payments
  • Remodeling
  • Taxes (especially for those who pay quarterly)
  • Prescription items like glasses or contacts
  • Tuition

So how do you work these sinking funds into your budget?

Easy: estimate how much you’ll need in your sinking fund and divide that estimate by the amount of months (or paychecks) away that goal is. You’ll know exactly how much you need to put aside from each month or paycheck to reach your goal.

In addition, you can then check your sinking fund goals against your budget to make sure you can sustain all these goals on top of your normal spending.

Simple enough, right?

Well, planning the amount you’ll need to save is where things can get tricky.

Some expenses like a down payment are easy to save for. In the case of a down payment, you’ll know exactly how much you need to put down to purchase the home, making for an easy time identifying the amount you need to save.

But many expenses don’t have definite amounts.

For example, car repairs are to be expected regardless of your driving habits. However, repair shops can differ wildly in price for routine repairs, so you won’t be able to plan for an exact amount.

In this case, you’ll need to do some more leg work.

To save for unsure amounts, do some research into what that expense typically totals to. Look back at your spending history on the expense in question for further insight.

Then, use the data you’ve gathered to determine an amount and save a little bit more than that amount for cushion. Stop saving when you’ve accumulated enough.

When you spend out of this sinking fund, replenish it as needed.

This approach has a bit of an “emergency fund” slant to it, but it retains the focus on specific expenses instead.

What Type of Account Should I Put My Sinking Fund In?

spare change for sinking fund

Generally, high-interest accounts of any kind will work great for sinking funds as your interest can either speed up your savings goal or add some extra cushion in case circumstances change.

However, the optimal sinking fund account varies based on your timeline and the uncertainty of the expense.

If you need to save for something more short-term, a high-interest money market account will serve you well. They earn great interest rates, while still retaining enough liquidity to access your money when you reach your goal.

Similarly, a high-interest savings account is a good choice. Savings accounts are different than money market accounts, but for the purpose of building a sinking fund, the benefits are the same (barring differences in interest rates).

Either way, the liquidity of these types of accounts relative to longer-term investments makes these accounts excellent for more uncertain expenses like home remodeling or car repairs.

As for longer-term goals…

Let’s say you’re saving for a large goal several years in the future, such as a house down payment. You won’t need to access the money for a long time and you usually know how much you need to put down on a house, making the relatively illiquid bank CD an excellent investment vehicle.

In exchange for locking away your money, you earn interest rates that blow high-interest savings accounts out of the water.

Such interest rates can be of great help when you need to save $40,000 to put down on a house. Also, the illiquidity greatly reduces temptation to dip into your sinking fund irresponsibly.

If you’re saving for multiple goals at once, you’ll want to separate each one into a different account for tracking purposes.

What about stocks, you ask?

True, the stock market is quite liquid and the potential returns tend to be greater than most bank products.

But the stock market is not a good place to store your sinking fund, as it’s more volatile and doesn’t come with the same FDIC insurance that you bank account has.

When you’re saving for specific financial goals, you should prioritize safer investments over slightly higher returns. You should be relying on your own savings to fill your sinking fund, not the returns.

Not to mention that to access your sinking fund, you’ll need to sell off stock. This can lead to a bunch of tax consequences that render your savings efforts less effective.

Sinking Funds vs. Emergency Funds Vs. Your Savings

sinking fund money

On the surface, sinking funds look like a rebranded version of emergency funds. In addition, they don’t seem that much different from your normal savings.

But each type of fund is designed for a different purpose.

Sinking Funds vs. Emergency Funds

An emergency fund is one of the first financial assets you need to build before you start building wealth.

Instead of serving as a means to build wealth, your emergency fund serves as a last resort against unexpected, dire situations like job loss or hospitalization. Without it, you’d have to put yourself in a ton of debt or seek out other solutions that aren’t much better.

Common recommendations say to save at least 3 months of living expenses in your emergency fund. To be safe, you should strive for up to 6, especially if you have dependents such as family.

Your best bet when building your emergency fund is to open a high-interest savings account. That way, your money will earn an appreciable amount of money while it’s dormant.

Once you’ve built up a proper emergency fund, you aren’t supposed to touch it until you find yourself in dire straits. You shouldn’t contribute more to it either unless you use it for an emergency, as it’s not meant to be a spending account and your money could be better invested somewhere else.

On the other hand, sinking funds are designed for savings for specific, planned (or foreseeable) expenses. For example, you might use a sinking fund to save for your next vacation. That’s a planned expense.

Or perhaps your phone is getting old and you’ll eventually need a new one. You don’t know exactly when, but you know it’ll happen someday.

But if you dropped your phone and it broke on the sidewalk, you’d dip into your emergency fund as that’s more of an unexpected expense.

Not to mention not having a phone in today’s society nearly constitutes an emergency.

Sinking Funds vs. Your Savings

A general savings account is used to build wealth. When you end up with extra cash and nothing to spend it on, your best bet is to put it into your savings.

Eventually, you’ll have enough money to where your money works for you by earning significant interest.

Because of this, you don’t want to touch your normal savings at all, lest you slow down your wealth-building efforts.

But sinking funds aren’t designed to build your net worth; they do allow you to make purchases that would otherwise put you into debt. Therefore, they can help you maintain your net worth while still enjoying life’s big purchases and reaching your financial goals.

Of course, in the best case scenario, an asset you buy with your sinking fund could increase in value or earn you additional income as a nifty byproduct.

Sink Your Teeth Into Your Goals

Saving for big-time financial goals is intimidating, especially when you’re already trying to juggle paying the bills and building your wealth.

But if you take advantage of sinking funds, you can budget for large purchases without a lot of extra headache.

Depending on your goals, you could be running multiple sinking funds at varying interest rates. If you have no other need for the interest income, hey, it’s free money! Spend it as you wish, although we recommend investing it to build your wealth that much more.

If you’ve got a financial goal you’re working towards, open an account suitable to the nature and timeline of your goal and start saving! For best results, set up an automatic transfer so you don’t even have to think about the money you’re stowing away.

Previous Post

11 Places To Look For Free Firewood To Save Money

Next Post

How To Meal Prep On A Budget And Lose Weight At The Same Time

Money Monarch

Money Monarch

Money Monarch is a team that is in love with personal finance. We are on a mission to help you make the crucial decisions that will outline your financial future.

Next Post
How To Meal Prep On A Budget And Lose Weight At The Same Time

How To Meal Prep On A Budget And Lose Weight At The Same Time

turo review

Turo Review - How To Make Money With Your Car

pay off debt or save

Should You Pay Off Debt Or Save Money? What You Need To Know

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Follow Money Monarch

  • 8 Followers

Popular Post

  • donating plasma doctor visit

    How Much is My Plasma Worth? Ultimate Guide to Selling Plasma for Money

    0 shares
    Share 0 Tweet 0
  • 13 Ways Nurses Can Make Extra Money From Home

    0 shares
    Share 0 Tweet 0
  • 3 Ways To Get A Free CarFax Report When Buying A Car

    2 shares
    Share 0 Tweet 0
  • The Ultimate List of Blog Income Reports (100 Bloggers to Follow)

    11 shares
    Share 0 Tweet 0
  • How To Get Free Stocks – 8 Ways To Pocket Free Shares

    0 shares
    Share 0 Tweet 0

Follow Our Page

Follow Us

  • Looking for freedom from your job? Want to work from anywhere in the world? Learn how you can earn a full-time income by getting paid to write - even start your own blog! #blogger #blogging #paidtowrite #sidehustle #entrepreneur #entrepreneurlife #makemoneyonline #quityourjob
  • Want to make your money work for you? We
  • Are you a single parent of working hard to support your whole family? We
  • Trying to pay off never ending student loans or high interest credit cards? Let us help! This article explains how to track expenses and earn extra income to help you achieve financial freedom! #studentloans #creditcarddebt #financialfreedom #finance #sidehustle
  • Your health is important! Get rewarded for eating right and working out - win up to $10,000!  #weightloss #fitness #healthylifestyle
Facebook Twitter Youtube Pinterest Instagram

Money Monarch is here to help you save and make more money at home while at the same time helping you get your finances right

Pages

  • Privacy Policy
  • Terms of Use
  • Contact Us
  • About Us

Recent Articles

3 Ways To Get A Free CarFax Report When Buying A Car

3 Ways To Get A Free CarFax Report When Buying A Car

June 17, 2020
Meet Credit Karma Savings – A New High Yield Savings Account With Even More Perks

Meet Credit Karma Savings – A New High Yield Savings Account With Even More Perks

June 17, 2020

© 2022 MoneyMonarch.com

No Result
View All Result
  • Make Money
  • Banking
  • Investing
  • Money Management
  • Real Estate

© 2022 MoneyMonarch.com