A sinking fund is a fund set aside for a specific purchase you will need to make in the future.
For example, cars wear out over time. We all know that the current car we are driving won’t last- sooner or later it will break down and we will need to buy a new one. We have two options: one, we can do what most people do and finance a car (the average new car payment is $550/month and the average used car payment is $375/month), or two, we can save up for it and pay cash.
I recommend using a sinking fund for cars. Other than a house, our cars are typically the most expensive things we will buy.
I’ve been using a sinking fund for the past twenty years. Every month I’ve made a car payment to myself that goes into our “Car Fund” envelope. Instead of a car payment to a dealership or bank (with subsequent interest) my car payment goes directly to me. When it comes time to get another car, I take cash and pay for it outright.
We use a sinking fund for birthdays, Christmas, car repairs, vacations- all the things we know we will need to pay for. Sinking funds are great ways to minimize “those things that always come up.” I’m always puzzled when clients tell me that they had to use credit cards to pay for Christmas and birthdays (did they not know they were happening this year?).
A financial coach can help you establish sinking funds to enable you to pay cash for your purchases and avoid paying interest on things that were easy to anticipate.