Week 2 – Five Reasons To Set Up A Sinking Fund
Below are 5 reasons your budget should include a Sinking Fund. To learn the purposes of a Sinking Fund check out Emergency Fund vs Sinking Fund: What’s the difference?
- We can predict the future
Most annual bills are relatively predictable by this I mean some will stay the same (e.g. bills that you have control over such as your Christmas and birthday budget), some will see a slight increase (e.g. costs that were more than you forecasted) and on occasion some will see a reduction (e.g. a cheaper premium for an insurance which can be found through shopping around). Therefore we can use last year’s numbers and ‘predict the future’ to avoid being short on money.
- Stop the pay check to pay check cycle
Putting a portion of money into a Sinking Fund for annual payments each month allows you to add some of your monthly income to other accounts as well. By dividing your annual bills by 12 (12 months) your money can stretch a lot further. Over the course of the year your annual bills will be met but you are still able to save and put money toward other savings.
- Take away the stress of unexpected expenses
Failing to plan is planning to fail and no one enjoys the feeling of failure – it’s stressful. A Sinking Fund enables you to plan to succeed and allows you to take control of your budget and give you peace of mind throughout the year. It helps to alleviate the stress that comes with bills you may have forgotten were due.
- Your Emergency Fund is not affected
By introducing a Sinking Fund into your budget you are actively saving money, specifically to pay for your annual bills. Therefore, you are greatly reducing the risk of any unexpected bills which may force you to take money from any other savings accounts.
- You will have a temporary backup Emergency Fund
The purpose of a Sinking Fund is to designate part of your monthly income to pay for your annual bills and not to be used for emergency situations. However, a Sinking Fund could be used as a temporary Emergency Backup Fund should your actual Emergency Fund be depleted. It is advisable that this does not become a regular occurrence and should it be used it must be replenished quickly, as it would defeat the purpose of the Sinking Fund.
Best of luck and happy planning!
This post is part of a #weeklywins series hosted by @Lottiebudgets and @CharlotteMusha (Follow us on Instagram)
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