Sinking funds are the cornerstone of every budget. Not only do they ensure you have money to hand for those important expenses that regularly come up, but they help you practice the discipline of planning ahead and not spending everything you earn.
Some people prefer to have cash sinking funds – actually withdrawing the money and putting them into sinking fund envelopes.
But how can we replicate the process digitally?
1. Financielle sinking funds tracker
In the Financielle app you can create, personalise and manage your own sinking funds in your very own tracker. Head to the Playbook to learn all about sinking funds and access a list of suggested ones to include in your monthly budgeting — such as Christmas, Hair & Beauty and Holidays.
2. Open Up a Bank Account that is capable of virtual “Spaces” or “Pots”
The good news is that several popular UK banks now offer this feature, making it easier than ever to manage your sinking funds digitally:
- Monzo – calls these Pots, allowing you to create multiple savings pots directly within the app and set targets for each one.
- Starling Bank – calls these Spaces, with the ability to set savings goals and move money in and out easily.
- NatWest – has recently launched their own Pots functionality, letting you divide your money into separate pots within your account for specific savings goals.
- Chase – offers savings Pots with competitive interest rates, making your sinking fund money work harder while it sits waiting to be used.
- Revolut – offers Vaults, where you can create individual saving spaces and even set up round-ups or recurring deposits.
Whichever bank you use, the principle is the same: you can ring-fence money for specific purposes without needing a separate bank account for every goal.
Decide what your annual sinking funds are for, their totals and work these into your monthly budget. Now a rough and ready way to do this is take the annual amount for the sinking fund, for example £1,200 for car insurance, divide it by 12, and incorporate this into your monthly budget, meaning you need to put £100 a month into your car insurance pot.
You can get a little more sophisticated and adjust the monthly amount depending on when the pot is needed (for example, car insurance due in 3 months at £1,200 means you need to put £400 per month into it for 3 months), but the simple way still works. If in doubt, over-fund, or set yourself a challenge to fill your sinking pots early with extra income from side hustles.
3. On pay day, transfer your sinking fund money
In your budget, you should have individual monthly amounts for your sinking funds plus a monthly sinking fund total (i.e. all of them added together). If you have a separate bank account for your sinking funds, then you need to transfer the total monthly sinking fund total into the separate account on the first day of your new budget.
4. You then allocate the individual monthly amounts to each sinking fund.
You do this within your banking app, for example £50 into the Gift pot, £100 into the Holiday pot, £100 into the Car Insurance pot and so on. With Monzo, Starling, NatWest, Chase, or Revolut, this is just a matter of a few taps.
5. You can now track your sinking fund progress.
With the sinking funds set up, the totals set and the money transferred in, you can see your progress towards your sinking fund targets. When an expense comes up that is in your sinking fund pots, you can just withdraw the amount needed and spend – without it impacting your regular budget items.
In the Financielle Money Playbook, we talk about how implementing sinking funds is one of the best ways you can prepare for planned expenses, spend without feeling guilty and practice discipline of putting money aside. They are also key in helping to become debt free – as it is often these one off expenses such as car insurance renewal or holiday that people often need to resort to credit cards for.
Whether you organise them in cash envelopes or digitally – they really are a great way to get organised and help support your financial wellness.
If you want more help on setting up your sinking funds, check out our helpful guide here.