Setting up a sinking fund can be an overwhelming process at first. You need to understand how much money you’ll have to work with and what types of investments suit you. Do you want to set up your fund or use an investment company? Is it possible for your family members to invest too? If you’re ready to take the plunge and set up a sinking fund, keep reading for everything you need to know. There are so many different options that it can be hard to know where to begin. But by following these simple steps, you can help ensure that your money is put toward the right causes while giving back simultaneously.
- Determine What you’re Saving for and How Much you’ll Need
Before you can decide how much you’ll need to bring in and how often you’ll need to make deposits, you need to know your goal. For example, if you’re saving for a vacation, you might only need a small amount of money every month. But if your goal is retirement, you may want to be prepared for a significant amount at once. Your financial goals should determine how much money will go toward a sinking fund and how often it will be deposited. Many, if not most, financial experts recommend taking a percentage of your income and putting it into a syncing fund.
- Determine your Timeline for Savings
Setting up a sinking fund can be a great way to save money for short-term goals. But if you want to save up for a vacation, you may want to start saving more than one month in advance. You don’t want to wait until the last minute and find out that you don’t have enough money. Plus, if your goal is something big like retirement, reaching your goal can take a long time. You may have several years of savings before seeing any money you’ve saved. If this is the case, setting up a sinking fund that will deposit money as soon as you’ve saved up enough for your goal can be helpful.
- Decide Where you’ll Save the Money
Once you know what you’re saving for and how much you’ll need, it’s time to decide where you’ll be storing your money. You can save your funds in a business bank account, but this can be expensive. If you have a business, it may be worth the cost because the bank will likely charge less for the services they provide than an online brokerage account would. Another option is to open an online brokerage account like Betterment or Wealthfront and use that as your primary savings location. Online brokerages offer more options than traditional banks and are generally more affordable.
- Work the Sinking Fund into your Current Budget
Now that you’ve set up your sinking fund and decided where to store it, it’s time to work the money into your current budget. You can do this in several ways. For example, if you’re saving for retirement, you could move the money from your sinking fund into a 401(k) or IRA account. If you’re saving for college, you could transfer the money from your sinking fund into a 529 plan. You can also leave the money in its current account with no changes to your spending or savings habits. In this case, the sinking fund will only be used when more funds are available than needed for whatever goal you’re working towards.
Setting up a sinking fund is one of the best ways to save money and grow your wealth. As you’ll learn in the next section, there are many ways to make your money work harder when you need it.