In investments and corporate finance, a sinking fund is an allocation of money to pay the debt. It’s not a financial term used in everyday language, but if you’re a professional treasurer, this is likely something you’ll come across frequently. If you want to ensure that your financial situation will be secure for years by setting up your sinking fund, read on for more information about what this means and how to do it!

The Secret to Setting Up a Sinking Fund

Setting up a sinking fund doesn’t have to be complicated. The best way to set one up is to put together a budget and figure out how much you want to contribute from each paycheck. Once you know your goal, it’s easy to determine the total amount of money you wish to donate and how often you’ll do so. You can then make the necessary changes to your expenses to ensure those sinking fund contributions are made consistently.

1. Put Together a Budget

When setting up a sinking fund, the first thing to do is to put together a budget. The most effective way to do this is on paper rather than an electronic spreadsheet or software program. Having a hard copy in front of you will help you pay attention to your spending habits and ensure that money isn’t wasted on things that are not essential for your basic needs.

Figure out how much money you’re currently making monthly, including how much extra cash comes in each month in interest or dividends. Write down how much you spend every month on rent, food, utilities, and other expenses that can easily be estimated.

2. Decide How Much You Want to Contribute

Next, you must figure out how much money you want to contribute each month to your sinking fund. It’s important not to set a number that’s too low or too high. A good rule of thumb is to take what you make in interest and dividends each month and add it to your other income. For example, if you have $2,000 in interest and bonuses every month on top of $6,000 from your job, adding this all together would mean you have $8,000 per month to work with. You might want to start by contributing about 25% of this ($1,200) towards your sinking fund.

The secret to setting up sinking funds is to devote part of your monthly paycheck to this purpose. As you get older, you’ll probably want to increase that amount as you get more money and need more for retirement and other purposes. Your initial goal is a starting point that will hopefully become a firm part of your financial routine over time.

Because a sinking fund is an essential part of your financial life, you should create a dedicated account with your bank or credit union so that all payments will go to this purpose. Please find the best interest rate for you to borrow and make the appropriate arrangements with your bank so that it’s easy for them to transmit the money directly from your regular salary into this account.