fbpx

Sinking Funds and Why I Kind of Don’t like Them

Saving money is important. Usually any method that gets people to save more money I am for it. However, don’t like these sinking funds.

What are sinking funds?

A sinking fund is a savings fund for a specific goal. On the surface that is fantastic. When you have a concrete goal in mind then it’s easier to stay motivated and make continued progress towards your goal.

However, with sinking funds you have multiple savings goals that you contribute money to at the same time. Let’s say you have ten savings goals, such as

  • a new car,
  • emergency fund,
  • vacation,
  • wedding,
  • a new refrigerator,
  • a new washing machine,
  • a baby shower,
  • side hustle,
  • higher education costs,
  • and a down payment for a rental property.



You would use your budget to determine how much money you have total to put towards saving each month. You would then take that dollar amount and divide it by ten. Then put the same dollar amount in each saving account for the six different goals.

For example, let’s say you have $500 to put towards saving (you determine this amount with your budget). This means that you would have $50 to put in each sinking fund every month.

You can also, change the dollar amounts for each goal, as long as the total adds up to the total amount you are able to put towards saving every month.

This is a way to work towards saving for multiple goals at once, which is the appeal. However, it’s not precise enough and doesn’t make fast enough progress for me.

I would rather make smart goals that have a specific dollar amount attached. Once the first goal is met then you move the amount that you are saving to work on the next goal.

Say that new refrigerator will cost $500. After five months, using the sinking funds saving method you only end up with $250 in that specific saving account. Did you save money? Yes. However, you haven’t really met your goal of being able to purchase the refrigerator.

I’m not saying sinking funds are an absolute no-no. If you’re not saving for a specific timeframe and you have a laissez-faire attitude about the savings goals, then sinking funds are a good option.

For example, let’s say you will go on vacation in three months no matter what and the amount of money determines the type of vacation. Then go ahead and use sinking funds and however much money is in there is what you have to make it work.

However, if you like to be more specific and work towards actual goals, then stick with using specific dollar amounts for specific goals and working towards only a couple goals at a time.

Have you tried the sinking funds method while saving money? Did it work for you?

Related Articles

Responses

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

Pin It on Pinterest