Sinking Funds

A sinking fund is a way of budgeting your income to save money for expenses you know are coming, by putting away a little bit of money each month. That way, you’re saving small amounts monthly to reach your goal, without having to pay a big chunk of money all at once.

You can use sinking funds for any financial wants or needs you know you will have to, or want to, purchase. 

Here are some examples:

• Getting your hair or nails done
• Christmas 
• Wedding expenses
• Birthdays
• Holidays
• Car maintenance
• House renovation
• Concert tickets
• Weekly coffee 

It can be as small as creating a fund to make sure you have money for your weekly coffee and you’ve budgeted for it, or for big financial goals like a house renovation you have planned. 

Both funds require saving money regularly, but there is a huge difference. An emergency fund is there for unexpected expenses that could put you into debt if you don’t have the money to cover it. Some examples include unexpected vet bills or your washing machine breaking. Emergencies happen so it’s good to be prepared for the unexpected and have a safety net in place. 

A sinking fund is for those expenses you know are coming and can plan for, or for any wants. We all know Christmas is coming and you’re likely to spend money on presents and social occasions, the same goes for your loved ones’ birthdays. It’s a way to become organised with your money and budget your pay, so if you regularly buy a coffee on a Friday you can budget for that in your sinking funds. It’s important to use your emergency fund for emergencies and your sinking funds for everything else. 

Step 1: Decide what you want to save up for. It can be the big ticket things you want to save for like a once-in-a-lifetime holiday, or a self-care treat like your regular hair appointment you have every 3 months.

Step 2: Set up an easy-access savings account to which you’ll transfer the money. Banks like Monzo have a handy feature called ‘pots’ where you can split your money into labelled savings easily.

Step 3: Decide how much you’d like to save to reach your financial goal. If you want to have £600 for Christmas presents and you start your sinking fund in January, simply take how many paydays you have left until you start shopping for presents and divide it by £600. It will tell you how much you need to put away every month to reach your goal by December. 

Step 4: Start transferring your money every month and see your sinking funds build.

There are no rules to how many sinking funds you can have. Make a list of all the potential sinking funds you think you would like to set up. It’s good to have sinking funds in an easy-access saver so you can withdraw the money when you need to. 

Good money habits like having sinking funds and an emergency fund are a great way to avoid debt, but if you’re already in debt and need help, you can get started online. Use our online debt advice tool. If you’d prefer, you can speak to the friendly and experienced debt advisors at Angel Advance. We help people daily with their financial goals, offering no-obligation debt advice day and night! Visit our online debt advice tool for help with debts, or contact our team via email, phone or WhatsApp today.