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What is a sinking fund and how do you set one up?

Name ____________________ Date __________

Key ideas

  1. Monthly amount equals cost divided by months. A $600 bill due in 10 months needs $600 ÷ 10 = $60 a month, starting now.
  2. Known costs go here, surprises do not. Registration and gifts belong in sinking funds. Job loss and sudden medical bills belong in the emergency fund.
  3. A late start means bigger payments. If a bill is due sooner, divide what is left by the months remaining. That still beats paying with a credit card.

Vocabulary

Sinking fund
Money you set aside a little at a time for a known future cost, like car insurance, holidays or a new laptop.
Emergency fund
Cash set aside only for surprises like a job loss, a car repair or a medical bill. A common goal is 3 to 6 months of essential costs.
High-yield savings account
A savings account that pays a much higher interest rate than a typical bank savings account, often offered by online banks.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.

Work it out

Priya has four irregular bills: car registration, holiday gifts, yearly car insurance and a vet checkup. She saves for each one by the month until it comes due.

  1. Car registration: $180 ÷ 6 months
  2. Holiday gifts: $600 ÷ 10 months
  3. Car insurance: $720 ÷ 12 months
  4. Vet checkup and shots: $300 ÷ 12 months
  5. Total to save each month
  6. Per paycheck, paid twice a month
  7. Transfer each payday

Check yourself

  1. Your car insurance bill is $900 and it is due in 6 months. How much should you save each month?

    • A. $75
    • B. $100
    • C. $150
    • D. $180

  2. Which cost fits a sinking fund best?

    • A. Losing your job
    • B. Holiday gifts
    • C. A sudden trip to the emergency room

  3. Where is a good place to keep sinking fund money?

    • A. Your everyday checking account
    • B. A stock index fund
    • C. Cash in a drawer
    • D. An insured savings account

Your turn

Scroll back through 12 months of bank and card statements and list every bill that did not come monthly. Pick the next one due, divide it by the months left and schedule that transfer to savings.

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Answer key

What is a sinking fund and how do you set one up?

Work it out

  1. Car registration: $180 ÷ 6 months$30
  2. Holiday gifts: $600 ÷ 10 months$60
  3. Car insurance: $720 ÷ 12 months$60
  4. Vet checkup and shots: $300 ÷ 12 months$25
  5. Total to save each month= $175
  6. Per paycheck, paid twice a month2
  7. Transfer each payday$87.50
  1. Each bill is divided by the months until it is due: $180 ÷ 6 = $30, $600 ÷ 10 = $60, $720 ÷ 12 = $60 and $300 ÷ 12 = $25.
  2. Together that is $30 + $60 + $60 + $25 = $175 a month.
  3. She is paid twice a month, so she transfers $175 ÷ 2 = $87.50 each payday into one savings account with four named buckets.

Check yourself

  1. C. $150 $900 ÷ 6 = $150 a month. Divide the cost by the number of months until it is due.
  2. B. Holiday gifts Holiday gifts come at a known time each year, so you can plan for them. Job loss and medical emergencies belong to the emergency fund.
  3. D. An insured savings account An insured savings account keeps the money safe, separate from spending and easy to move when the bill is due.