Question of the Week
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How should I use sinking funds?
Sinking funds are a manageable way to prepare for big recurring expenses.
They’re dedicated savings accounts that allow you to deposit money steadily throughout the year so when the expenses hit — like vacations or holiday spending — you’re ready to cover the cost.
Without a sinking fund, it’s easy to turn to debt to cover these big expenses. Even though we know trips and major holidays happen every year, it can still be hard to cover them without advance planning.
To start a sinking fund, brainstorm the expenses you anticipate in the next 12 months. Then, consider opening a high-yield savings account dedicated to that purpose.
You could opt to automate transfers directly into the account from each paycheck or manually move money over whenever you’re able.
If you end up having more than you need in the account, it’s no problem. You can use the money for a different purpose — save it for next year or add it to your emergency fund. (A sinking fund is different from an emergency fund. The latter is for unexpected hardships such as a job loss or car repair.)
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