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When Nora Martin was expecting her first child, she wasn’t going to let all the many baby costs bring her down. She had a plan.
“I pretty much wrote up everything that we needed … and then split up the total over six months to see how much we would have to save each month to get to our goal,” Martin said.
This practice of splitting a large financial goal into easier-to-manage chunks has a special name in the personal finance world. It’s called setting up a sinking fund.
What Is a Sinking Fund?
A sinking fund is a pool of money you regularly contribute to so you spread out the cost of an upcoming expense over time.
The term “sinking fund” comes from corporate business lingo. Businesses set aside money in a sinking fund to repay debt or a bond or to prepare for a large capital expenditure.
But you don’t have to own a business to benefit from this money-saving strategy. It’s a smart approach for everyday people to save up for big money goals, future financial obligations and recurring bills outside of regular monthly expenses.
What Do I Need a Sinking Fund For?
Saving money in a sinking fund helps you manage upcoming costs that would overwhelm you if you neglected to plan ahead.
If you don’t have a great deal of disposable income each month, it might be tough — if not impossible — to cover a big expense all at once. For instance, if you waited until December to buy Christmas presents and planned to spend about $800, you might be forced to charge the expenses on your credit card in order to make it happen.
If you set aside money over time in a sinking fund — say, $100 a month for eight months — you can avoid going into debt or having to borrow money.
Having a sinking fund also helps you avoid dipping into your emergency fund when (non-emergent) big expenses pop up. Likewise, you don’t have to pause your progress on other money goals, like paying down debt or investing for retirement.
Sinking funds make upcoming…
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