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What is a sinking fund?
Until now, your household budget has helped you cover your day-to-day living expenses, but that isn't its only purpose. You can manage your daily costs without one. It’s time to shift gears and start planning for your needs and wants over the long term.
Let’s start with your wants, because that’s much more fun.
A sinking fund is designed to help you achieve something you desire, even if you don't strictly need it. Or maybe you do—only you get to decide that. Either way, you can't cover the cost with a single paycheck. A sinking fund is a smart solution that makes saving much easier.
Let’s say that one July day, you stumble across a video of snowboarding tricks online. It reminds you that as a teenager, you dreamed of snowboarding, but the best you could manage was a borrowed plastic sled. Now you’re an adult and you support yourself. It’s time to make that dream a reality. This year, you’re hitting the slopes!
After scouring dozens of articles, guides, and forums, you’ve put together a list of the necessary gear. Board, bindings, boots, wax, and everything else. You know exactly how much it will cost. A few thousand? It’s a lot, but you can do it—after all, dreams are worth the price. You start setting aside as much as you can each month, and thanks to that, you manage to save the required amount by March. Right after the season ends.
What went wrong? You just needed a little help!
How do you build a sinking fund?
You create a sinking fund to finance specific expenses that are larger than what you can afford in a single month. This means you need to break the cost down into installments. But instead of paying a bank or a lender, you pay yourself.
An effective sinking fund is built on a few foundations:
- a specific goal;
- a specific amount;
- a specific deadline;
- a separate place to store the money.
Let’s go back to that snowboard. If it’s July, the gear costs 2,000 PLN in total, and you currently have 200 PLN in savings, how much do you need to set aside each month to be able to ride this season instead of next?
It’s simple. Divide the required amount by the remaining time. For example:
(2,000 PLN - 200 PLN) / 6 months = 1,800 PLN / 6 = 300 PLN
This means you need to save at least 300 PLN per month. You can save more, of course, if you’re able to—that will help you reach your goal faster. However, if you can’t afford to set aside that much every month, you’ll have to wait until the end-of-season sale to buy the board. It might seem like a saving, but you’ll have lost a whole year.
Why did I mention keeping funds separate? When you have only one account with all your money in it, your savings get mixed up with your daily spending money. It’s easy to dip into funds you weren’t supposed to touch.
Open a dedicated sub-account at your bank. Give it a clear name (e.g., "snowboard"), set a specific target date, and define the amount. Some banks even let you choose a matching icon or upload a photo. All of this will serve as a reminder of what you’re working toward. You’ll also be able to track your progress and see exactly how much you still need.
I recommend setting the target date a little bit early. Not only will this improve your discipline, but it will also allow you to make your purchase comfortably without rushing.
Irregular Expense Fund
An irregular expense fund is a very similar concept, but it’s not for fulfilling your wants—it’s for covering expected but sporadic costs. You are aware that these expenses exist, and you know perfectly well that they are inevitable throughout the year.
Unfortunately, you usually only remember them right before the payment deadline, and scrambling to come up with an extra few hundred zlotys can turn into a major problem.
Car insurance (OC/AC), annual maintenance, property tax, university tuition, or heating bill adjustments—and many other costs you don't think about on a daily basis. If these expenses were spread evenly throughout the year, they wouldn't be a big deal. The problem arises when these payments pile up over a short period.
If, after covering your daily living expenses, your household income allows you to save, say, 850 PLN a month, there’s no way you’ll be able to cover all those fees at once. And if you aren't setting money aside for them specifically, there’s a high probability that the cash will disappear under "mysterious circumstances." However, that 850 PLN a month adds up to over 10,000 PLN a year! That’s enough to cover all your fees, provided you plan for it.
How do you build an irregular expense fund?
The size of an irregular expense fund will be different for everyone. Mine might be 5,000 PLN, while yours might be 10,000 PLN. It all depends on how many of these expenses you have.
Make a list of everything that comes to mind and write down the estimated amount for each item. If you don’t know exactly how much the fees will be next year, don’t worry. Use last year’s figures. The difference likely won't be significant. Once you know how much money you need to cover all these expenses, divide the total by 12 months. You’ll get the amount you should be setting aside each month.
If you feel that might be too little and you need a larger safety margin, divide the total by 10, but keep saving throughout the entire year anyway.
For example, if your total costs add up to 6,000 PLN, dividing that by 12 means you need to set aside 500 PLN each month to reach your goal. However, if you divide the total by 10, you should set aside 600 PLN monthly. This way, you will either reach your goal in 10 months or end up with 7,200 PLN.
Make sure these funds are not mixed with your daily budget in your main account. They must not go back into your general spending pool. Use a sub-account or a separate account—whichever is more convenient for you—but don't make them unnecessarily difficult to access. Simply eliminate the risk of accidentally spending that money.
