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What Are Sinking Funds?

Have you heard of sinking funds? Maybe someone has mentioned it in the pub but you're not one hundred percent sure what it means. Well, it's to do with personal finance and that means you may want to learn more about it. Especially if you're trying to get your monetary life in order. Let's break past all the financial lingo and put things in terms we can understand. You have come to the right place to find out all about sinking funds and how you can start your own.

sinking funds

What Are Sinking Funds?

Let's break things down into the most simplest of terms. Down to the bare bones if you will. What are sinking funds? Well, a sinking fund is a method of save money by setting aside a little bit each month. It's a way of saving for things over a period of time, rather than finding the money you need, when you need to hand it over in exchange for a product, or service. Lots of people might use the idea of sinking funds without even knowing that labelling. Sinking funds can work in a variety of different ways though, which is where you need to find out the option that works for you.

How Do They Work?

Different people use sinking funds in different ways. Some of them identify what they need to pay out for annually, and save up for it every month. This could be car insurance, for example. You know a ball park figure that you will need to pay for your car insurance every year (annually is cheaper than monthly payments!) so you can save monthly or weekly out of your bank account into a dedicated bank account, for that specific reason. This is so easy to do with online banking. Other people take actual cold hard cash out of their salary and put it into envelopes. Said envelopes have the thing being saved for on them. One could be summer holiday and another might be house insurance. You get the idea.

woman money

How Can You Start Your Own Sinking Funds?

Firstly, you need to figure out the way you are going to save. If you have an online bank account, it is pretty easy to set up addition accounts linked to that. Some bank accounts even let you save different pots directly in your one account. Look at the bank you have and if needs be, do a little research and maybe even switch banks if there are facilities and functionality you'd like to use. You can even set up standing orders to transfer a certain amount of money from your current accounts into a dedicated sinking funds account every week, monthly or whenever you like.

If the envelope system sounds good to you, get some envelopes and get labelling. Other people choose to use labelled glass jars. How much money you are planning on saving might mean you question envelopes and jars though. Do you want hundreds of pounds in your house? Or is it safer in a bank?

What Should You Use Them For?

Sinking funds can be used for everything and anything. From annual insurance for your house and vehicles, to medical expenses, home repairs, campervan maintenance, a course you want to put yourself through and even saving up for Christmas. We know the festive season will happy every year so plan for it! There are lots of things we pay for every year or have ambitions to do. An extension on your house being quoted at £5000 sounds like a lot. But when you start putting money aside week after week, you can quickly start to build up a pot of money to pay for that.

You might worry about money for university but putting £10 a week away throughout your child's young years will help when they get to needing it. Break down the amount of money with sinking funds and it takes away that nightmare feeling of having to pay for the car insurance when it comes around. No more questioning yourself about where you'll get that £200 from this month. Relax, it's already set aside and waiting for you to use.


How Much Should You Save?

The amount you should save into your sinking funds depend on how much you need to save overall and how quickly you want to save it. This is easy for annual payments as you simply divide however much you'll need by 12 to get monthly payments, or 52 to get weekly payments. So, for the car insurance example we used above, you need £200 a year for car insurance. Monthly payments would be £16.67, weekly payments would be £3.85. Of course, there are things you won't know how much you need.

Figure out the amount you think you'll spend on that new car or use the quote from a builder for the price of your kitchen extension. Then work out when you'd like to have the money by. If it's a new car in the next 2 years, do the maths. Maybe the new kitchen can wait for 18 months, do the maths again and start saving. Of course, you might even consider putting away £10 or £15 a week to pay for home repairs. Put this away every week and you'll build up a decent amount pretty quickly, which you can dip into now and again to improve your home as you see fit. Same goes for car repairs – as they can be pesky things!

Top Tips For Saving Money Into Your Own Sinking Funds

Sinking funds are fantastic and hopefully you have a handle on how you can use them. We do have some top tips for you though. Automatic payments are your friends. We worry enough about money in this life, you don't want to be spending your evenings transferring money to and from different accounts. Go through the process of setting up automatic payments once and it will do it every week or month for as long as you tell it to, leaving you to get on with the enjoyable parts of life!

Keep track of how much if in each account, even by using a spreadsheet! You can also make a tracker yourself to tick off each payment you make into your sinking funds. The final top tip is to start. Just start. You won't be thinking that you should have delayed even more, you'll be thinking that you should have started sooner!

Get your finances in order with sinking funds and you'll be less stressed about money than ever before. 

sinking funds piggy bank

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