Summer vacations are around the corner. Have you saved enough to take your family on a good trip or to relax on a staycation? Or are you planning to use your emergency fund or credit card to pay for it?

Wouldn’t it affect your monthly budget and the savings you created for unexpected life events?

What can you do differently in such a situation? How about setting aside some money every month for such expenses? Why not try sinking the funds?

Now that we have caught your attention, here’s all you need to know about sinking funds and how it works!

Sinking Funds: Funds That Do Not Harm Your Monthly Budget

This is a strategic way to manage your monthly budget by setting aside a small portion of money per month. You can use the money kept aside for buying car accessories, Christmas gifts, vacations, stationery and more.

When you use sinking funds, you can save your emergency funds or avoid using credit cards to pay for some planned expenses.

Saving for Rainy Days as You Build Sinking Funds

Here are some perks of using this budgeting technique that you should become aware of -

• It helps in planning expenses like paying insurance or getting the car repaired.
• Sinking funds help in saving for major expenses. With every amount you set aside regularly, you can create a corpus for a major purchase.
• This technique helps you from getting into a debt trap as you would not have to use your credit card for a major purchase.
• A great way to avoid impulse buying – when you plan your funds your perception about spending changes.
• Your emergency funds are left alone for real-time emergencies.

Sinking Funds vs Emergency Funds

Sinking funds and emergency funds are poles apart. The first reason is that sinking funds are planned for expenses you can see coming up soon – your kid’s soccer tournament, buying presents for a friend’s wedding, or planning a trip abroad.

Emergency funds, on the other hand, are savings for unexpected hiccups like a sudden breakdown of your air conditioner or faucet leaking early in the morning while you prepare for the day.

Creating a Sinking Fund: How to Do It!

The process of planning your sinking fund is simple but requires disciplinary saving. To help you easily create a sinking fund, here’s what you need to do –

• Decide what you want to save for.
• Set a monetary target.
• Create a timeline for the purchase.
• See how you want to save your money.
• Make a realistic fund. If it requires some extra work, just do it.

Sinking funds are an apt savings tool if you foresee a major upcoming expense. You can use the money you save for anything from buying a new couch to planning a short weekend trip to renovating the roof of your house. Since strategic planning is involved, there are no risks too. A win-win in every way!

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Written By - Tanvi Pathak