What Are Sinking Funds and Why Do I Need Them?

Have you ever heard of ‘Sinking Funds‘? If not, then you may be wondering what are sinking funds? Your next question may be whether you need them.

What Are Sinking Funds and Why Do I Need Them?

Sinking funds are savings for expenses you expect to encounter, but don’t know when. They may also cover infrequent events that don’t occur each pay period, such as Easter.

When setting up your Sinking Funds, you have various choices:

  • You may decide to use separate bank accounts for each sinking fund.
  • You may keep the money in jars at home. This isn’t the safest idea for anything other than small sums of money.
  • You may want to lump all your savings together in one place. We do this and keep track of what money belongs to what fund/purpose on a spreadsheet, but a notebook would do.

What you decide to save for will vary from what we or any other person saves for. Certain things will be the same, for example, if you also buy gifts for people at Christmas. You may have children’s costs to consider, whereas we don’t. The key is to think of all the irregular costs that catch you out and destroy your regular monthly budget. Try to include those things.

Fun Fact (from Wikipedia):

‘The sinking fund was first used in Great Britain in the 18th century to reduce national debt. While used by Robert Walpole in 1716 and effectively in the 1720s and early 1730s, it originated in the commercial tax syndicates of the Italian peninsula of the 14th century, where its function was to retire redeemable public debt of those cities.’
Bird's eye view of four sets of hands holding smartphones - What Are Sinking Funds and Why Do I Need Them?

Our Sinking Funds have saved our skin and our budget many a time! Here’s what we put money by for each month:

  • Home insurance premium (buying it yearly works out cheaper than monthly premiums).
  • Car tax (buying it yearly works out cheaper than paying for it more frequently).
  • Car insurance premium (buying it yearly works out cheaper than monthly premiums).
  • Breakdown cover.
  • M.O.T. & servicing.
  • Sight tests every two years.
  • Boiler service.
  • Six-monthly dental checks.
  • Prescriptions.
  • Unexpected dental bills.
  • Car repairs, parts & tyres.
  • Gifts (birthdays and Christmas gifts for family. We buy for each other out of our personal allowances).
  • House renovations and items.
Do you save regular amounts of money each week or month for costs that you know will come up? What do you save for? I’d love to hear.

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I love hearing from people who want to improve their finances and/or simplify their lives. Don’t be shy! Comment, contribute to the Facebook page, or send me a private message. I will always try to help you.

Lisa aka Bunchy

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