Ever busted your monthly budget to treat your friends on your birthday? Try setting up a sinking fund next time. Find out why sinking funds are a smart saving technique.
Ever busted your monthly budget to treat your friends on your birthday? Whether it was for your birthday or any other occasion, all of us have put a hole in our household budgets at some point in our lives. Why do we end up taking such ricks, especially with our finances? Isn’t there a solution to put an end to this? Your Credit Card is always an option, especially if you make use of the interest-free period that it offers. But there’s another simple solution and it is called a sinking fund!
A sinking fund is like your own pot of gold that you hide at the end of a rainbow. Well, technically, sinking funds are sums of money that you set aside in different accounts for specific purposes.
With a sinking fund, you save a small amount periodically for a particular purpose. A sinking fund is usually used to pay for an item that will eventually need to be replaced or pay off a debt. But honestly, you can use your fund any way you see fit. This can be anything from funding a birthday treat to buying a new gadget or the replacement of a home appliance like a fridge or washing machine. You save till you have enough to make the purchase or till the event occurs.
You can also set up more than one sinking fund. Let’s take the example of Lehar. Her first anniversary was just eight months away and she wanted to gift her husband something grand (approx. Rs. 25,000). Also, she wanted to organise a family get-together for her dad’s 60th birthday (approx. Rs. 20,000). And she wanted to buy herself the new iPhone (approx. Rs. 55,000). What did she do? She set up three different accounts – one for each of the above. Simple, isn’t it?
How does a sinking fund differ from a Savings Account or an emergency fund?
A Savings Account is where you put money without any specific purpose and it isn’t time bound either. An emergency fund is usually set aside for unforeseen contingencies such as a medical emergency or loss of your job.
In contrast to these, a sinking fund is dedicated to a specific goal. So, you plan how much you’re going to put in it and for how long. For example, you’re planning to buy a new car in the next two years. The car costs about Rs. 4,00,000 and you’re setting aside around Rs. 17,000 every month. You know that you’re going to use this money in two years and for what you will be using it.
Where should you keep your sinking funds? Keep it anywhere you want; just make sure that it is easily accessible when you need it. You could stash your fund in a Savings Account but it might be more prudent to put it in a Fixed Deposit or Recurring Deposit.
Damn, it’s so simple to maintain a sinking fund! But then, why aren’t people adopting this technique for their major purchases and bills? Here’s a two-word answer – no patience. People don’t have the patience to wait for months to make their purchases. But remember, being patient could mean not getting into debt.
Now that you have a brief understanding about sinking funds, let’s look at some ways you can use your funds.
Home Appliances/Furniture Fund
Whether you have just bought a new house or you’ve moved in with your girlfriend/boyfriend, this fund is a must-have. Wouldn’t you want a refrigerator, a washing machine, a sofa set, a few tables, a king-sized bed, etc. in your house? These expenses might not fit in your monthly budget. So, it is better to start a sinking fund for such expenses.
Holiday Fund
Ah! The most-loved fund of all.
Have you been dreaming about going to Switzerland or Mauritius for a long vacation? Start putting away money into a holiday fund now. In a few years, you will have gathered enough funds to fulfil your dream.
Birthday Fund
Are you planning on buying a gift for yourself? Or do you have to treat three different groups of friends? Whatever you want to do, we suggest that you start putting aside some money every month into a birthday fund. This way, you won’t need to borrow from friends and family to meet your birthday expenses.
Gadget Fund
Have you been eyeing the latest smartphone or gaming console in the market? Unfortunately, you can’t buy it because you don’t have enough funds. Such expenses don’t usually fit into your monthly budget but with a sinking fund, you’ll be able to buy that gadget you’ve been dreaming of.
Gift Fund
Your best friend’s wedding is coming up. Or your dad’s birthday is just around the corner. Of course, you would want to gift them something nice and grand. Open a gift fund and start saving money for all the important occasions in life.
Be awesome with your money and open different sinking funds for your different purchases. Also, sinking funds don’t have to be limited to the above mentioned ones. You can open one for whatever you want, even if it is as crazy as a ‘dating fund’ or a ‘booze fund’. Oh! And don’t forget to include ‘sinking fund’ in your monthly budget.
If you think that a sinking fund isn’t for you, you should consider getting a Credit Card. Not only will you be able to meet your expenses, you get to enjoy a load of rewards too.
Additional Reading: Shopping With A Credit Card Has Benefits!
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