Sinking Funds

Last month I hit my car savings goal for 2021.So I thought it was vital that I take time to discuss just how I did it.

At the beginning of 2020, I made the decision to create a car maintenance fund. My car at the time was 11 years old, so I wanted to be prepared for unexpected maintenance that may occur in the future. I had no goal for this account so I contributed about $150 per month.  I knew that if I didn’t use the money in the account for car maintenance, I would later allocate it towards the down payment of a new car.

Fast forward to 2021,I decided that in 2022 I would purchase a new car. So I set a goal to save $10,000 by year end. I turned my car maintenance savings account into a car down payment sinking fund.

A sinking fund is a lump of money that you set aside separate from your emergency fund. 

To determine the lump of money that you will need to set aside, you first need to determine 

• What will this fund be used for?
• How much do you want to save?
• Your deadline to have this amount saved?

After you’ve determined those three factors, you can calculate the amount you will need to set aside monthly to reach your goal.

If you would like to save $1,000 for a down payment on your next car by December 31st (it’s currently June 1st), you would need to save 142.85 per month to reach your goal.

You can create a sinking fund for just about anything. Here are some suggestions:

• Vacation
• Christmas
• Birthday’s
• Back to School Shopping
• Seasonal Shopping
• Car Maintenance
• Home Repairs
• Self-Employment Taxes
• Wedding/Other Event

A sinking fund is not an emergency fund. Emergency funds are used for circumstances that you don’t foresee like, an emergency hospital visit or a sudden job loss. Sinking funds are used for events that you foresee in the future.

Saving doesn’t mean that you’ll never spend the money. It means that you’re putting yourself and your future goals first. This is what financial freedom looks like.

Tell me, what have you saved for this year?