Sinking funds were a financial game changer for us. We waited far too long to set up sinking funds and I regret it!
Sinking funds eliminated financial stress and made budgeting much, much easier.
What are sinking funds?
Sinking funds are accounts with a purpose.
They are accounts you save into regularly for spending on expenses that are irregular expense, non-monthly expenses, unpredictable or big one time expenses.
It’s a mini savings account for an expense you know you’ll have in the future.
Sinking funds make saving for these hard to budget items strategic and stress free. You set a little bit aside each month until you hit your goal… and then you spend it!
So if you’re saving up for an event 6 months from now, you put a smaller amount aside into the sinking fund each month until the event where you spend it all. Sinking funds are designed to let you spend without stress or worry.
What sinking funds should I set up?
In general you should look at your life and consider using sinking funds for things that are unusual budget items.
- Large one time purchases like a new car or your vacation.
- Yearly or quarterly bills that aren’t paid each month like life insurance or car insurance.
- Yearly expenses you are expecting but only happen once like Christmas or new clothes at the start of the school year.
- Unexpected expenses that you know will happen but you don’t know when like car repairs.
These are the common types of expenses you can make stress free by using sinking funds. An easy way to find the expensive events you might want to start a sinking fund for is go through the last year of expenses and see where big bills hit and where you struggled to cover something during a normal month’s budget. These things might need to be sinking funds for you.
By contributing to sinking funds each month from your normal budget you can handle these expenses that are hard to budget for and never touch your emergency fund or go into debt.
Common Sinking Fund Categories
Other common sinking fund ideas:
- Car replacement
- Car maintenance & repairs
- Car insurance
- Car tags
- Home maintenance & repairs
- Home decor
- Medical expenses
- Dental expenses
- Pet expenses
- Kid expenses
- Life insurance
- Annual bills
The sinking funds you decide to set up will be based on your life stage and what events you have happening.
Some, like saving for Christmas or planning for car repairs, will apply to most people.
Types of Sinking Funds
In general I’ve seen there are a few common ways to set up sinking funds.
- Cash envelopes sinking funds. Since a sinking fund is money you will be spending, it makes sense to sometimes do them in cash. For these you can use cash envelopes or a more secure set up like a safe.
- Multiple savings accounts. You can set up multiple accounts with some banks like Capital One 360 and give each sinking fund it’s own account. This is my preferred method.
- One savings account with a spreadsheet. Many people like to put away money into one big savings account but then track what everything is assigned to with a spreadsheet or app.
Whichever way you decide to set up you accounts, the point is to save for those expenses that would otherwise stress your budget.
In the video I show you our sinking funds and how we’ve got them set up in Capital One 360 where we keep our savings. I’ll also be opening new sinking funds so you can see how that works.