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What Are the Benefits of a Sinking Fund?

When it comes to building a budget, it's important to account for all your monthly expenses. Most of us have recurring bills, such as rent or mortgage payments, food, transportation, insurance and utility bills. These expenses stay about the same month to month, making it easier to know what to include in your budget.

But what about the expenses that only occur once or twice a year? How can you fit these occasional expenses into your budget?  

Here's where sinking funds come in!

What is a sinking fund?

Unlike an emergency fund, which covers sudden unexpected expenses, a sinking fund is for the expenses you know are coming in the next few months. Think of it as saving for planned future expenses. 

You could use a sinking fund for expenses like:

  • Holidays
  • Insurance premiums
  • Tax bills
  • Minor car and home maintenance
  • Birthday or wedding gifts
  • Seasonal clothing or supplies 
What expenses do you have coming up in the next few months? While these bills may only roll around every once in a while, they're still very important to include in your budget.

How to use sinking funds?
Once you know the upcoming expenses you need to save for, set aside money each month in a dedicated account for each expense. The funds are meant to be withdrawn only when the expense or bill comes due. 

To decide how much to save each month in a sinking fund, start by identifying the total amount you need. Then, divide the total amount by the number of months (or weeks) left until you need the money. Let's say your car needs new tires in four months. If you plan to spend $500 on the tires, you'll need to deposit $125 in a dedicated account each month leading up to your service appointment. It's that simple! 

What are the benefits of sinking funds? 
  • No more surprises. Avoid getting caught off-guard when you need to pay for your next oil change or get a birthday gift for a friend. You'll already have the money set aside to cover these costs when they roll around!
  • Stay organized. Keeping your funds in separate accounts will help you organize your finances. It will also help you resist using your emergency fund for non-emergencies.
  • Get ahead of debt. Having sinking funds can help you achieve greater financial flexibility and freedom! When you're well-prepared for future purchases, you'll avoid the need to take on new debt, which could slow your debt repayment progress.
Where to keep your sinking funds?
There are many ways to organize your sinking funds. You could simply open separate savings accounts for each fund. One option is Wright-Patt Credit Union's (WPCU) TrueSaver® savings account, which offers our best savings rate from your first penny saved.  

Another savings account option is a Money Market account. This is a wealth-building savings account designed to offer more value than a traditional savings account. 

If you don't need your funds right away, consider a WPCU Club Account or Share Certificate. A WPCU Club Account allows you to save for 3 to 12 months ahead so you can plan for life's known expenses. A WPCU Share Certificate offers a guaranteed rate of return when you deposit funds for a fixed length of time, from 6 to 72 months.  

Sinking funds can be a powerful tool in your budget toolbox. After all, knowing you're well-prepared to cover future expenses is a great feeling!  

For more financial education and planning resources to help you make the most of your hard-earned money, visit WPCU's online Education Center. ​