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Sinking Fund 101

What is a sinking fund?

A sinking fund is a savings fund most commonly used for big upcoming purchases so that you can save a little bit at a time and not be overwhelmed. These funds allow you to approach these hefty purchases in a way that’s is gradual and only takes a bit out of your wallet at a time if planned far enough in advance.

What are some examples they can be used for?

  • Vacation
  • Wedding
  • Holiday
  • Car
  • House

How can you create a sinking fund?

  1. Decide what you’re saving for. A few timely ideas include holiday shopping and holiday travel. You do not have to limit yourself to one sinking fund.
  2. Determine how much you will need to save.
  3. Open a savings accounts specifically for these sinking funds so it is super easy and doable. Aim to have a high-yield savings account so your money grows while it sits. Compounding interest will keep adding money to your fund even if you can’t make regular contributions.
  4. Add your sinking fund(s) to your budget. Don’t forget to account for the money you are placing in your sinking fund. This will make certain that all of your money is accounted for.
  5. Automate deposits. Even if it’s a small amount from every paycheck, it’s a great way to start building that fund!
  6. Make it Fun! Invite your friends to try out Snowball Wealth’s very own Fun Money Fund challenge in our app which is designed as a sinking funds for extra spending money!

Is there a difference between a sinking fund and emergency fund?

Yes! An emergency fund is money you set aside for the unknown. This can include anything from short-term unemployment or emergency situations such as ER visit or your car breaking down. You should aim to have 3–6 months of expenses saved.

Best of all, a sinking fund can help you achieve a healthier money mindset! It can be a new way of thinking about your money. Do you want more support managing your money? You can start a free trial of our Premium program and book a 1-1 call with one of our financial experts!

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