Why using sinking funds is a revolutionary act

Photo courtesy of steve mcnicholas


A sinking fund, as I talked about before, is a way of saving up for large expenses in advance. It’s a kind of a quaint, old-timey way of doing things, which might be why it appeals to me.

A sinking fund is way simpler than it even sounds, and it sounds pretty obvious to begin with. But while saving up for something before buying it may seem quaint, I believe that it’s also revolutionary. I believe this because it runs counter to pretty much every message we’re given, everything we are sold.

Pay now, buy later

You can have it today!” “Buy now, pay later!” “Pay no interest until 2087!” Etc.

Even if you never fall for truly awful products like retail-branded credit cards or those “same-as-cash” deals, we still think nothing of waiting until a big expense comes and then figuring out how to pay for it. That is the default: buy something now and then pay for it later. Okay, maybe not with small purchases, but with anything large, this is usually the case. And how do we normally pay for it in those cases? With a credit card.

But buying things with other people’s money (which is what we’re doing) is immensely profitable to those who happen to have the money we’re buying things with. Immensely profitable. Whenever I find a figure about how much money lenders make, it always seems to have a few more zeroes than last time I checked.

We can’t allow this to continue happening. Too much is at stake. We need to turn this around, and no longer allow other people to profit off of our desire to have things sooner than we can afford them.

So how do we train ourselves to save up for things first and then buy them later?

  • Plan. What happened last year? Is it likely to happen this year or next year? If you keep track of your expenses, you should have a sense of roughly how much something that happened in the past might cost in the future. Or you can make an educated guess. The more you put away, the more you can be ready for when the “expectedly unexpected” happens. Past performance can actually be an indicator of future results.
  • Have patience. Saying no to things now in favor of having them later is hard, and takes a kind of Wheaties-level discipline. But it’s important to remember that you’re not saying “no”, you’re only saying “not now.” Which should be some consolation.
  • If you have them, leave your credit cards at home. In a jar. Filled with concrete. It’s amazing how hard it is to put money on a credit card when you don’t have it on you.
Put credit cards here. (Photo courtesy of roadscum)

Put credit cards here. Photo courtesy of roadscum


You can’t afford not to use a sinking fund

But I don’t have the money to create a sinking fund!

This is an interesting objection to me, because in this case, you’re not saying that you lack the money to do something, you’re merely saying that you lack the money to pay for it in advance. And yet, by putting something on a credit card, and then paying it off over time, you’re clearly paying for it; you’re just paying for it afterward! And in addition, you’re also paying a scandalous credit card interest penalty on top.

So I don’t understand: if you don’t have the money to pay for something before you buy it, then how do you have the money to pay for something after you buy it…with interest?

Now, if you’re just starting out with this sort of thing, it can be overwhelming. And if you start a sinking fund today and a big expense comes due tomorrow, you’re not going to have enough to cover it. But now is the time to be thinking about those expenses that will come next year, after you’ve had a chance to build something up.

Pick what to sink

Now, as for where to put these sinking funds, it really doesn’t matter. You can create free online savings accounts at a number of different retailers. Your bank will often let you create secondary accounts for free. Hell, an envelope in a (locked) drawer can work. Especially when you’re just starting out. (Note to self: too much money in an envelope may cause you to lose sleep.)

The more important decision is to figure out what to have sinking funds for. If this is new to you, start with one thing. Start with your car repair, or holiday gift giving, or an upcoming birthday, or a trip, or whatever. Pick one thing, and save up for it.

And then, when it comes due, and you whip out some money and pay for it outright, it might just blow your mind. Like this guy (wisdom happens 50 seconds in):

Quietly revolutionary

Remember that if you’re intentional with your money, you will plan for the things that are guaranteed to happen, and come up with a best contingency plan for all those things that might happen. If you’re intentional with your life, you’ll know what you’re doing and why, planning for the future while making the best of today.

All of those things can be accomplished with a sinking fund. Quietly, even quaintly, revolutionary.

But enough about me. Do you have objections to starting a sinking fund?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on November 7, 2013