emlWhat is Sinking Fund?
In simple term, a sinking fund is a fund that set aside for a certain purpose or occasion.
Sinking Fund vs Emergency Fund
Benefits of having sinking funds.
1. Give yourself a peace of mind
Sinking funds are normally set up ahead of time in order to allocate enough fund for the specific purpose.
For instance, setting up a sinking fund for car maintenance. It could be stressful when we look at the huge car maintenance charges. However, you can eliminate the stress by allocating a smaller amount every month for car maintenance. This enables you to reduce unnecessary worries and give you peace of mind.
2. Reduce the risk of tapping into emergency fund
By setting up sinking funds, you are prepared in advance for future expenses or even an event that might or might not happen. It acts as extra protection to your emergency fund.
This enables you to manage unexpected expenses such as car repair fees for tyre puncture without the need of touching your emergency fund.
3. Spend without feeling guilty
When I first started my personal finance journey, I felt guilty no matter small or big spendings. It seems like I am not the only one that has this uneasy feeling when spending money. According to Forbes, many felt guilty when they spent.
“Wants/Fun” sinking funds come in handy in this situation. It enables you to find a balance between your happiness and your financial health. You are allowed to spend on whatever you want with the money you have in the sinking fund without feeling guilty.
4. Prevent overspent
This point is obvious. As you only allow to spend whatever you have in the sinking fund, it reduces the probability to overspend.
5. Encourage delayed gratification
A sinking fund is designed to set aside an amount of money for a certain purpose. You are not supposed to swipe your card without having the money in your sinking fund. This, directly and indirectly, encourage delayed gratification.
50% of the time, I would decide not to get something even if I have saved up the money in the sinking fund. I realize most of the things I saved up for is something I can live without. Or, there are better options available.
How Sinking Funds System (Normally) Works?
Every individual is special and different in many ways. It would be better to implement your own set of rules for your sinking fund system. However here’s some ideas for you.
1. A sinking fund is set up for each specific purpose (or category)
Each sinking fund should serve the sole purpose or category. Set up different sinking funds for each of them.
2. The amount you spent is limit to the amount available in the sinking fund.
If you only have RM150 in your clothing sinking fund, then you should not spend more than RM150 when you shop.
However, the system is flexible, you can always adjust accordingly. If you have only RM20 in your groceries sinking fund for the month, you don’t need to limit your groceries to RM20 and starve to death.
3. You can borrow in between different sinking funds, repayment is optional.
Let us take the above groceries sinking fund as an example. If this month you need more for groceries, you can chip in money from the eating out sinking funds, or others as well.
Whether to repay back the sinking fund that lend money, it is up to you.
4. Different contribution to each sinking fund.
The needs of contribution for each sinking fund might be different. Set a different contribution rules for the sinking funds.
Eg.
Grocery Sinking Fund: Every paycheck
Car Maintenance Sinking Fund: Every paycheck
Start a Business Sinking Fund: 50% from side hustle income
Travel Sinking Fund: Yearly bonus
Hobby Sinking Fund: Credit Card Cashback received
Types of Sinking Funds
Future Expenses (Expected/Unexpected)
Sinking funds that set up not only for those that expected to pay in the future but also expenses that might occur and unable to expect.
Example: Pet medical fees, repair cost for roof leakage or dental appointment for toothache.
Wants / Fun
Wants or Fun sinking funds are set up to ensure we do not sacrifice our happiness for the sake of our financial health. It is possible to maintain a good financial health and at the same time live to the fullest.
Example: Sinking funds for hobbies. entertainment sinking funds and sinking funds for eating out.
Goals
In simple words, goals sinking funds is what we used to known as saving goals. We aims to save up an amount for a purpose, such as buying your first house or your first car.
Example: down payment for purchase of house, travel goals and children education fund.
Sinking Funds Categories:
Health
Beauty
Clothing
Family
Gift & Donations
Celebrations or Festivals
House
Vehicles
Child
Hobbies
Study
Happiness
How to set up sinking funds?
- Determine which sinking funds to set up.
A few ways to determine:
(i) Expenses that you could foresee paying in the coming future. Eg. insurance payment or membership fee.
(ii) Determine by looking through your goals. Eg, retirement, immigration or starting a venture.
(iii) Find out what activities or purchase brings you the most happiness and satisfaction. Eg. funds for eating out, clothing, or game purchase. - Set an amount for each of the sinking funds.
By finding out what sinking funds to set up, mostly you already have an estimation figure for each of them. In case you have no idea how much you need, you have your best friend Google to help you out.
It is better to set an amount slightly more than the actual amount as inflation and price changes might happen. - Start to allocate funds to your sinking funds.
You could determine how you want to allocate funds for each of the funds. You may do it by paycheck, by income category and so on. - Record and track your sinking funds’ progress.
Keep a record of the cash in and cash out for your sinking funds. It would be better if you could save them in a separate account.
In the end,
Sinking funds could assist you to control and improve your personal finance. However, this system only works if you are disciplined to follow it thoroughly.
Disclaimer: All above are for general information purpose only. For finance advice, please always refer to a certified financial planner.
