What is a Sinking Fund?

A sinking fund is a way for corporations to put aside money at specific intervals in order to pay a bond or a debt that will be due at a later date. You can use this same strategy to achieve your goals or pay for expenses that aren’t due on a monthly basis. By planning and putting away a little bit each paycheck, big expenses can be less of a burden.

Let’s say you pay your car insurance every six months, and that bill is $600 each time. Based on when the bill is due, you can figure out how long you have to save the full amount. For our example, let’s say you have six months.

To calculate how much to save, take the total due and divide it by the number of months you have. In our example it’s $600 divided by 6 which equals $100 per month. You would put your “sinking fund” requirement right on your monthly budget for $100. Or if you’re paid twice a month, you can even break it down further to $50 per paycheck.

I suggest moving the money for your sinking fund out of your checking account and into a savings account. Out of sight and out of mind! This can prevent you from spending the money on other things. Then, when the bill arrives, simply transfer the money back into your checking account and pay the bill.

The next month, start adding back to the sinking fund for the next time your insurance is due.