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Daily Banking

What is a sinking fund?

January 12, 2024
3
min read

How can you manage expenses that exceed your monthly budget? Start a sinking fund so you’re prepared for bigger costs!

Woman saves money in piggy bank

Have you ever made a large purchase, and immediately felt a sinking feeling? A worry that you’ve spent too much, even if it’s for something you need?

That’s exactly what a sinking fund is for! It’s a way to save money throughout the year for large expenses – the costs you typically can’t pay all at once, but that you know are coming.

You can use a sinking fund to cover anything from a new TV to a vacation.

If you get nervous about large purchases, this might be the perfect solution. Here’s how it works and how to start one:

How a sinking fund works

A sinking fund allows you to prepare for the larger costs we all face from time to time. Think of it as a type of emergency savings account, but for planned expenses.

When those costs arise, you won’t need to worry about going over your budget—you’ll know you’ve already accounted for the expense.

The key benefit of a sinking fund is that it means you can cover costs without relying on credit. That means you won’t have to pay interest on an outstanding balance.

A few more perks of a sinking fund include:

  • Indulge in bigger purchases, guilt-free!
  • Feel confident that you can cover large costs.
  • Get a better understanding of your budget.
What’s the difference between an emergency fund and a sinking fund?
An emergency fund is for unexpected expenses, like a car repair or roof leak. You don’t know how much the bill will be or when it will happen.

A sinking fund is for costs that you do expect. For example, you might know that you’ll need new winter tires for your car next year. You can set aside money each month, and by next winter, you’ll have enough saved to pay for the cost.

When not to use your sinking fund

It’s important to avoid spending your sinking fund on purchases that aren’t budgeted for. Try to use it only for the expenses you intended it to cover. Otherwise, it’s no different than a regular savings account!

How to start a sinking fund

Step 1: Choose the expense

First, make a list of the expenses you want to cover with your sinking fund. It can be for any financial goal on the horizon, like:

  • A wedding
  • Travel plans
  • Annual property taxes
  • Renovations
  • Down payment

Step 2: Make a plan

List the total cost of each expense and the dates you plan to pay them on. Next, figure out how much you’ll need to save each month to reach your goal.

Example:
Imagine that as a student, you know your tuition is due on September 1, 2024.

You expect to pay $4,000.

If you plan to start building your sinking fund in January, you need to set aside $450 each month in a savings account.

Step 3: Set up your savings account

Now it’s time to decide where to store your sinking fund! At Cambrian, you can open a Premium Savings Account to earn a high interest rate, while keeping your funds completely accessible.

Cambrian members can set up multiple savings accounts and give each one a unique name. You might call one “Travel fund” and another “Tuition”.

This means you can create sinking funds for each expense. At a glance, you can see how far along you are towards your savings goals.

You can also use automatic contributions to make saving easier! If you get paid bi-weekly, set it up so the money is automatically transferred from your chequing to your savings account every 2 weeks. Contact us to learn more!

We can help you start saving!

Let’s get the ball rolling on your sinking fund, so you’re ready to meet your financial goals in 2024. Book a meeting to talk to a Cambrian Advisor today!

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