How to set up a sinking fund and save towards a goal

If you want to save money towards something specific then maybe you should give sinking funds a try.

What is a sinking fund?

A sinking fund is a strategic way of saving where you set aside a little bit of money each month for a specific planned expense.

It can help you save for:

• Car repairs
  
• A vacation abroad
  
• Buying a new couch
  
• Remodelling your kitchen
  
• Or a home deposit

Whatever your goal may be, using a sinking fund can help you get there.

What is the difference between a sinking fund and an emergency fund?

A sinking fund is different from an emergency fund because an emergency fund is money put aside for an unknown expense. A sinking fund is a known planned expense you are slowly saving up for.

Your emergency fund should have enough money to cover 3-6 months of expenses for any sort of emergency. You can use it when unexpected events happen, like your pet needing emergency surgery, your car engine needing urgent replacement, breaking a tooth or your plumbing exploding. Sometimes life happens, so you should have money set aside and ready just in case.

How to create a sinking fund

When creating a sinking fund you determine the amount you need to save by dividing the total cost by the number of months you have to save for it.

Here are four easy steps to get started:

Step 1: Decide what you’re saving for

This could be anything like having funds for Christmas or buying your mum the newest iPhone.

Step 2: Decide where you want to store your sinking fund

Do not keep your sinking fund in your everyday account. So that you don’t accidentally spend it, it’s better to open up a savings account. When deciding on a savings account look for one with no monthly fees and low minimum balance requirements.

Step 3: Decide how much you need to save

As mentioned before, to determine how much you need to save, take the total cost of the expense and divide it by the number of months or weeks you have left - until it’s time to make the purchase.

That means if you want to buy your mum an iPhone 13 for Christmas and it’s July, you’ll have about five months to save. You’ll need to put about $270 in your sinking fund each month until December to hit the mark.

Step 4: Add your sinking fund to your budget

This step could be considered the most important. A sinking fund can only work if it’s in your budget. That way you are constantly making sure you are setting money aside to reach your goal.

Best accounts for your sinking fund

​​If you want the best of the best, check out our Mozo Expert Choice Award winners for Saving Accounts. More than 248 savings products were analysed and compared by a panel of judges to showcase which ones offer the greatest value to Australian borrowers.

Ready to start saving? Check out our savings account comparison table below to get started on your new saving challenge.