How to Create a Debt Repayment Sinking Fund

If you’re working to pay off debt, you know how challenging it can be to find extra money in your budget to put towards your debt each month. One effective strategy for making debt repayment more manageable is to create a debt repayment sinking fund.

What is a Debt Repayment Sinking Fund?

A debt repayment sinking fund is a savings account that you set up specifically for the purpose of paying off debt. The idea is to set aside a certain amount of money each month into this account, which you can then use to make extra payments on your debt.

Here’s how it works:

  1. Determine how much extra money you can afford to put towards your debt each month.
  2. Set up a separate savings account specifically for your debt repayment sinking fund.
  3. Each month, transfer the amount of money you determined in step 1 into your debt repayment sinking fund.
  4. When you have enough money saved up in your sinking fund, use it to make an extra payment on your debt.

By setting aside money each month into a separate account, you’ll be less likely to spend that money on other things and more likely to use it for its intended purpose: paying off your debt.

Why Use a Debt Repayment Sinking Fund?

There are a few key reasons why using a debt repayment sinking fund can be so effective:

  1. It makes debt repayment more manageable: When you’re trying to pay off debt, it can be overwhelming to come up with a large sum of money each month to put towards your debt. By setting aside smaller amounts of money each month into a sinking fund, you can make debt repayment more manageable and less stressful.
  2. It helps you stay motivated: Seeing your debt repayment sinking fund grow each month can be a great motivator to keep going with your debt repayment plan. Each time you make a transfer into your sinking fund, you’ll feel a sense of accomplishment and progress towards your goal.
  3. It can save you money on interest: By using your debt repayment sinking fund to make extra payments on your debt, you can save money on interest over time. The more you can pay towards your debt each month, the less interest you’ll accrue, and the faster you’ll be able to pay off your debt.

How to Set Up a Debt Repayment Sinking Fund

Setting up a debt repayment sinking fund is easy. Here’s a step-by-step guide:

  1. Determine how much extra money you can afford to put towards your debt each month: Start by looking at your budget and determining how much extra money you can realistically afford to put towards your debt each month. Even if it’s just $50 or $100, every little bit helps.
  2. Set up a separate savings account: Next, set up a separate savings account specifically for your debt repayment sinking fund. You can do this at your current bank or credit union, or you can open an account at a separate institution.
  3. Set up automatic transfers: To make saving for your debt repayment sinking fund even easier, set up automatic transfers from your checking account to your sinking fund account each month. This way, you’ll be less likely to forget to make a transfer or be tempted to spend the money on something else.
  4. Make extra payments on your debt: When you have enough money saved up in your sinking fund, use it to make an extra payment on your debt. You can do this by logging into your online account and making a payment or by sending a check to your creditor.
  5. Celebrate your progress: As you see your debt repayment sinking fund grow and your debt balance shrink, take a moment to celebrate your progress! Paying off debt is hard work, and it’s important to acknowledge and celebrate your accomplishments along the way.

Tips for Maximizing Your Debt Repayment Sinking Fund

Here are a few tips to help you maximize your debt repayment sinking fund and pay off your debt even faster:

  1. Start small: If you’re new to saving for debt repayment, start small and gradually increase the amount you’re saving each month as you get more comfortable with the process. Even $50 or $100 per month can make a big difference over time.
  2. Use windfalls wisely: If you receive a windfall of money, such as a tax refund or bonus at work, consider putting some or all of that money into your debt repayment sinking fund. The more you can put towards your debt, the faster you’ll be able to pay it off.
  3. Cut back on expenses: To free up more money for your debt repayment sinking fund, look for areas in your budget where you can cut back on expenses. This might mean eating out less often, canceling subscriptions you don’t use, or finding ways to save money on groceries and household items.
  4. Sell items you no longer need: Another way to boost your debt repayment sinking fund is to sell items you no longer need or use. You can sell items online through sites like eBay or Facebook Marketplace or have a garage sale to earn some extra cash.
  5. Consider a side hustle: If you’re really serious about paying off your debt quickly, consider taking on a side hustle to earn extra money for your debt repayment sinking fund. This could be anything from freelancing or tutoring to driving for a ride-sharing service or selling handmade items online.

Real-World Example

Let’s take a look at a real-world example of how a debt repayment sinking fund might work. Let’s say you have $10,000 in credit card debt with an interest rate of 18%. You’re currently paying $200 per month towards this debt, but you want to pay it off faster.

After looking at your budget, you determine that you can afford to put an extra $100 per month towards your debt. So, you set up a separate savings account and set up an automatic transfer of $100 per month from your checking account to your debt repayment sinking fund.

After six months, you have $600 saved up in your sinking fund. You use this money to make an extra payment on your credit card debt, bringing your balance down to $9,400.

You continue this process, saving $100 per month and making an extra payment every six months. After two years, you’ve paid off an additional $2,400 of your debt, bringing your balance down to $6,600.

By using a debt repayment sinking fund, you’ve been able to make consistent extra payments on your debt without feeling like you’re sacrificing too much from your monthly budget. And by paying off your debt faster, you’re saving money on interest and getting closer to your goal of being debt-free.