SINKING FUND
Businesses and organizations often create “sinking funds.” That’s a fancy way of saying “We’re saving up for a huge expense.”
This they do to reduce future financial problems, such as needing so much cash they have to take out a loan. It also saves them on interest (business loans are a higher interest rate than your mortgage). If they need a loan, but can’t secure one in a timely manner it may cost them opportunities for growth, too. So, putting some money put aside every quarter reduces risk of future losses, plus it improves cash flow and creditworthiness (in case they still need a loan).
The amount needed “sinks” as they pay into the fund and receive interest on it.
Guess what!
YOU CAN DO THE SAME THING!
What kinds of sinking funds could benefit you?
- Wedding
- Roof Replacement
Planning for Having a Family - New Car
- College
- Christmas Fund (one year is not enough time, but it can be an ongoing fund)
- Anniversary Trip
Where to invest the money? That depends on how long you have. Less than 3 years … CDs or other short-term secure investments, 5 years or longer … High Quality Stock Funds (move the money to CDs or short-term investments when you reach 3 years out because drops in the market can last 2 years, so you are building safety into your plan).
-Christmas is coming. You usually spend $3,000. Don’t wait until after you’ve spent it to pay for it. Save up $250/month in a sinking fund and earn interest instead of paying interest. Credit card interest is roughly 20% APR. You can earn 4% with short-term CDs. So, you can easily save $200 or more by setting up a sinking fund. Don’t spend your tax return, bump up your Christmas fund.
-Your daughter is turning 14. Some time in the next 10 years there COULD be a wedding. They cost $15-50k. Pray for $15k, but save for double. That comes to $300 per month for the next 7.5 years. Interest gets you to $30k. You won’t need a HELOC to pay for the wedding. (If no wedding you have enough money to go on that anniversary trip to Europe.)
-One really excellent purpose of a sinking fund is for your next vehicle. Last time you put down 20% and got a 6 year loan. Next time you want to put down 50% and only have 3 years of payments. The ultimate goal is to walk into the dealership, choose a car, write a check, and drive off in a paid-off car.
-There is one more reason: “What if…” What if you need a new roof, a furnace the next month, and replace a car the month after? Your credit might not handle so much at once; it could cause your credit score to drop below 500. When the score drops, depending on where you live, your auto insurance premiums and interest rates can rise. Whammy!!! A personal sinking fund can help you meet the needs without applying for a gaggle of loans. It is protection against a whammy.
What a sinking fund is NOT:
It is NOT a typical savings account. (An IRA is one type. Word is you need 25X the annual income you will desire in your IRA. But you may not…because you have a pension, Social Security, maybe a rental property…the income from all those sources count toward retirement income, too.) According to Dave Ramsey 54% of adults do not know how much they will need when they retire. Fact: this is more knowable than you think. For MOST the annual needed income is between $40,000 and $100,000. (That would be $1 to 2.5 million in an IRA, minus your pensions, Social Security, etc. over 25 years [roughly $500-750k].)
It is NOT an emergency fund. Yup! For emergencies … You lost your job, or your spouse got cancer and can’t work. You didn’t expect those. An emergency fund is necessary because life has unexpected bumps. It should have enough in it to pay 3 months of expenses. Hope you never need the cash.
Advantages of a sinking fund:
- Stress Reduction. It is so much easier to deal with life when you aren’t always worrying about the next big expense.
- Get ahead of the Curve. Hey! Wouldn’t it be nice to POCKET some interest instead of always paying for someone else’s yacht? The president of the bank lives in a gated community with the interest you pay on your loans. Take some of that back for yourself!!!
- And, by the way, you don’t have to do it all right now! What if you just had HALF put away? Wouldn’t that be better than draining your bank account and still not having enough for a down-payment?
This really is one of the few places where doing “something” is far better than doing “nothing.” Here is a sinking fund calculator.
Sink your teeth into that!
Copyright 2025 Donald Whelpley
[PLEASE NOTE that Don is always open to discussing the thoughts and opinions he shares here and welcomes comments as shared in the comment section. He doesn’t use other social media platforms and won’t see whatever you’d like to share with him if you post it elsewhere.
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