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There are lots of ways to save money, and one of the most effective methods is known as a sinking fund. A sinking fund is a special savings account that you set up and add money to on a regular basis. The idea is that the money won’t be accessible for a fixed amount of time, forcing you to save rather than spend.
A sinking fund is especially helpful if you have expenses coming up in the future — such as college tuition or retirement — because you can make sure that you have saved enough money beforehand. Read on to learn more about what a sinking fund is and why it’s so useful when it comes to saving money.
What is a Sinking Fund?
A sinking fund is a savings account that you set up and use to save money for a specific purpose. The best thing about a sinking fund is that it’s a regular account, so you can set up a schedule for yourself to contribute to it as part of your normal budget. I use a budget journal like this.
A sinking fund is designed to be a long-term savings account. This means that you shouldn’t ever plan to withdraw any of the money in it — instead, you should let it sit in the account for as long as you can, and use it to fund a specific goal. A sinking fund is often used to save for large expenses that you know are coming in the future, such as the costs of college or retirement.
How to Set Up a Sinking Fund
The first step to setting up a sinking fund is to decide how much money you want to save each month. Once you’ve decided how much to put away, open an account somewhere that you can’t easily access. This means that you’ll have to go out of your way to withdraw money from the account, which is the point. The best place to put a sinking fund is in a savings account.
Depending on where you live, you may be able to get interest on your savings — which is another added bonus. A good rule of thumb when setting up a sinking fund is to leave yourself about six months’ worth of savings. This means that if you know you’ll have to fork over $10,000 for a car repair or another big expense, you should start saving six months in advance.
How Sinking Funds Help You Save Money
A sinking fund works by helping you create a savings plan for a specific goal. This means that when you set up a sinking fund to save for a big expense, it’s important to be very clear about what you’re saving for. This will make it easier to manage your sinking fund and make sure you’re staying on track. If you set up a sinking fund to save for something like college tuition, you should try to start saving as soon as possible — but it’s important to keep in mind that you’ll need to keep saving until you graduate. Some people also like to set up multiple sinking funds to help them save for different goals. For example, someone who is saving for college tuition and retirement might have one sinking fund for each goal.
2 Steps to Creating Your Own Sinking Fund
There are two main steps to setting up a successful sinking fund. First, decide what you’re saving for — and how much you’ll need. Second, set up an account to put your money in. There are lots of different ways to set up a sinking fund, but the best method involves starting with a goal.
Once you know what you’re saving for, set up an account for the sinking fund and start saving. You can choose to put a certain amount of money into your sinking fund each month, or you can save a lump sum and then transfer it to the account.
Once you have your sinking fund set up, you can use the money to achieve your goal — and you won’t have to worry about getting yourself into debt.
Tips for Success with a Sinking Fund
Keep in mind that a sinking fund is designed to help you save for something specific — so it’s important to pick something that you really need. If you’re struggling to get started with a sinking fund, try finding a support group or joining a forum that can help you stay accountable. Having a clear goal in mind when you set up a sinking fund can help you stay on track. Make sure that you know exactly what you’re saving for, and that you have a plan for getting there.
Bottom line
Sinking funds are a great way to help you save for big expenses, like college tuition or retirement. To set up a sinking fund, you need to decide on a goal, open an account, and start saving. Remember to be clear about what you’re saving for, stay accountable to yourself, and have a plan for getting there. With a sinking fund, you’ll have no shortage of funds when the time comes to cash in!
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