Chapter 5: Saving Money
Once you’ve built your Emergency Fund, it’s time to focus on the bigger, predictable expenses in life — things like a new car, a down payment on a home, or a dream vacation. Saving for these goals can feel overwhelming at first, but breaking them down into smaller, manageable steps makes the process much easier.
One of the best ways to save for big expenses is to use sinking funds. A sinking fund is a separate pot of money that you set aside for a specific, planned purpose. Instead of scrambling to cover a cost when it comes up, you build the money gradually so it’s there when you need it. Sinking funds work well for all sorts of goals — from a holiday trip or new furniture to predictable annual expenses like car maintenance, insurance premiums, or holiday gifts.
The key benefit of a sinking fund is that it removes the stress of “finding” the money when the expense arrives. By setting aside a little at a time, you can avoid dipping into your Emergency Fund or relying on credit cards. Here’s how to set one up:
1. Decide on your goal
Get clear on exactly what you’re saving for and how much it will cost. Do a bit of research so your target is realistic. If the price might change — for example, if you’re saving for a down payment and house prices are rising — add a buffer. Having a specific number in mind will keep you focused and motivated.
Example:
Vacation – You plan to visit an all-inclusive resort in Mexico. After researching flights and hotels, you estimate a total cost of $2,500.
Home down payment – You and your partner want to save $100,000 over the next 5 years. You currently have $15,000, so you’ll need to save $85,000, or about $1,416 per month between you.
2. Create a savings plan
Work backwards from your target date to figure out how much you’ll need to save each month. If your timeline is flexible, you can adjust your contributions to fit your budget. Look for areas in your monthly spending where you can cut back to free up money — even small changes can add up over time.
Example:
If your $2,500 vacation is 8 months away, you’ll need to save about $312 per month. If that feels tight, you could extend your trip timeline or make small trade-offs in your budget to make it work.
3. Open a dedicated account
Keep each sinking fund in its own separate savings account so it’s easy to track your progress and avoid mixing it with other money. Many banks allow you to open additional accounts for free and even label them with nicknames like “Mexico Trip” or “First Home.” If you’re saving for multiple goals, consider having an account for each one.
4. Automate your contributions
Set up an automatic transfer to your sinking fund each time you get paid. Treat it like a non-negotiable bill to yourself. Automating the process means you won’t be tempted to skip a month, and your savings will grow consistently without extra effort.
Example:
If you need to save $312 per month for your trip, set an automatic transfer for that amount on payday. You’ll be steadily working toward your goal without having to think about it.
Sinking funds are a simple but powerful way to take control of big expenses. They let you plan ahead, avoid last-minute stress, and pay for important purchases without touching your Emergency Fund or going into debt.
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