What are Sinking Funds?
One thing I owe a lot of our budgeting to is Sinking Funds. I won't lie, the term used to really confuse me so I put off learning about them for a while. But with the help of my mum, I set them up and it has changed our lives... I know it sounds dramatic, but trust me here!
I was trying to explain sinking funds to my mum and she said, "Oh I have those, I call them pots". Pots is a much better name in my opinion but everyone seems to call them sinking funds! Sinking funds are essentially pots of money you can save dedicated to different areas. I am with Santander, and they let you set up little e-saver accounts, I then divide any leftover money between these accounts / pots / sinking funds. We have categories for Albie's birthday, Christmas, car insurance and holiday. We prefer to pay our car insurance in one rather than setting up a direct debit, so we can avoid the added interest. So instead we put a little away each month and then when it is time for renewal we can pay the lump sum. We also have our main savings pot which is for our house deposit.
Why sinking funds and not just savings?
We found that when we had one savings pot we would dip into it unnecessarily, or we would dip into for car insurance and then feel de-motivated. By having separate pots/sinking funds you can make sure you have enough saved for each area and budget your money much better. Our sinking funds essentially act as a financial safety net. I feel reassured knowing we have money aside for 'X, Y, Z'. It was also a great way for us to get into the habit of saving. We would be regularly checking and updating our pots / sinking funds, so we knew how much money would be coming in and out.
How do you start saving in your Sinking Funds?
Definitely start small. If you create hundreds of pots/sinking funds, you will overwhelm yourself and probably get disheartened as you have to spread your savings across so many different places, you won't build each pot up very quickly. We started our sinking funds in June 2023. We decided to start with two, Christmas and car insurance, as we had six months until these needed to be paid which gave us a good amount of time to get saving. Make sure you have an end goal too. We wanted to save £500 for our insurance and £300 for Christmas. Realistically, Christmas costs much more than £300, but we knew we wouldn't be able to save much more in only six months, especially as we are saving for house deposit too.
I use Santander's e-saver accounts to store my sinking funds. I know Monzo and Sterling have 'spaces' and 'pots' for the same purpose. Plum is also a great app because you can set up a direct debit or get it to round up your change. I have £250 in there and I didn't even notice it coming out! Other people use cash stuffing binders and save up that way too.
