Even with the best of intentions, it’s easy to go over budget at Christmas when you see that one little extra you’re convinced you need.
This is because so many of us don’t actually put a pot of money aside – we just keep a loose figure in our heads and hope for the best.
What you need to start doing, according to financial planning experts, is to create a ‘sinking fund’.
What’s that, you might wonder. It’s a pot of money you’ve put aside to ‘sink’ on something specific. Maybe it’s money for a Christmas, or a festival, a haircut, or a hen do. It’s money that will be spent, and has been earmarked specifically for something.
Financial expert and podcaster Vix Leyton says a sinking fund is a practical way of focusing saving on expenses that you know are going to happen but often slip the net when financial planning. It’s the kind of thing that can trip you up if you haven’t put money aside for it in advance.
‘This could be anything from ringfenced cash for car maintenance to wedding costs or even planning for Christmas,’ she says. ‘It’s not an emergency fund, which is planning for the unplannable, this is about anticipating something you’ll need to pay out for at some point.’
How to create a sinking fund
Leyton says you should decide on your project and the cost, divide that total up by how long you’ve got (if it’s £100 you need in three months’ time, you’d save £33.33 a month), and stash that amount regularly so it’s sitting there when the bill lands.
See it as an ‘instalment scheme for your future financial stability.’ We’re living in a time of high living costs and unemployment – starting sinking funds for big events or moments in your life will mean at least this isn’t one cost that will turn up as a nasty surprise.
And yes, this is more effective that just spending out of your main bank account. ‘When money sits in your main account, it has a habit of disappearing, even if you’re mentally ringfencing,’ Leyton says.
‘Spending is easier when it’s all in one pile and you don’t have to make an active choice to crack into it. A separate pot, whether digital or physical, gives you a visual reminder that this money is already allocated. It’s also psychological: once it’s labelled for “holiday” or “Christmas”, you’re less likely to raid it for impulse buys.
‘It brings clarity – you know what’s been saved, and what’s free to spend. It also allows you to set and forget; direct debit it away on payday along with your other bills and you won’t have a chance to miss it.’
Sinking funds are great tools for people who impulse buy or struggle to stick to a budget. If you have several months to save, Leyton recommends looking at Cash ISAs with a good interest rate for a nice little top up on your money.
How much to put into your sinking fund
The most ideal way would be to start with what you’ll realistically need and divide it over the time you think you have to reach a regular, affordable payment but it can be flexible.
But Leyton says this won’t be possible for everyone.
‘If you can’t afford the whole amount one month, put aside what you can, and aim to top it up when you’re in a better position,’ she explains. ‘
Also remember that it doesn’t have to be all or nothing – even if you only reach half the target, you’ve still halved the problem, and being honest with yourself when working out what you can set aside protects you from failure by “good intentions” and ending up throwing in the towel.
‘The aim is to chip away at future costs so they don’t land heavily,’ she adds. ‘A sinking fund doesn’t have to be perfect to work; even a partial one takes the pressure off when the bill arrives.’
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