Sinking funds can be a little confusing at first, especially if you are new to budgeting.
In fact, you might not have even heard of them!
So, what is a sinking fund anyway?
Sinking funds are basically mini savings accounts.
You will use a sinking fund to save for a very specific purchase or financial goal.
It’s usually (but not always), a short term financial goal (saving for a car, new couch, or Christmas presents).
The money is “sinking” because it’s not invested, or really doing anything for your long term financial goals.
Related: How to Set SMART Financial Goals
However, when you use sinking funds properly, you can prevent a lot of financial stress, and issues such as overspending, or the temptation to go in to debt to cover a large expense that you did not plan for.
Christmas is probably the most popular sinking fund to use as an example.
This holiday comes only once a year, on the same day every year.
However, we often act totally surprised when the day appears on the calendar. We scramble to throw funds together, desperately trying to make ends meet.
Related: How to Have a Debt Free Christmas
A Christmas sinking fund, will allow you to plan far in advance for this holiday, making sure there is plenty of cash in the bank when the holiday season “suddenly” appears.
If you’ve been trying to make sinking funds work for you, but you keep coming up short, there may be an issue with your budget.
Sinking funds are not a good idea if you are behind on your bills. Get caught up first, before trying to make sinking funds work for you!
Before you start setting up sinking funds, you need to make sure that you have your basic necessities taken care of, and are pretty good at creating and sticking to a budget.
Related Posts:
- How to make a Budget for Beginners
- Why You Need a Household Budget
- Budget Categories You Probably Forgot
- How to Cut Down Your Monthly Expenses
Prefer to watch a video about sinking funds? Head over to YouTube to watch, and don’t forget to subscribe to follow our Debt Free Journey.
How to Use Sinking Funds (with examples)
Sinking Funds Definition
A sinking fund is money that you set aside for a specific purpose.
This could be cash that you save up so you can pay your car insurance in full once a year, or something as small as the money that you save for Halloween costumes.
Sinking funds lessen the financial burden, because it is much easier to save up $10-$20 a month for say, Christmas presents, than it is to come up with hundreds of dollars all at once in December.
These funds are helpful because they cause you to be more intentional with your money, think more clearly about your budget, and plan ahead for expenses that are otherwise “unforeseen” or “forgotten”.
When people don’t plan ahead for holidays, back to school shopping, or other large expenses that only come a few times a year, these otherwise “small” life events suddenly seem like emergencies.
These “emergencies” evoke desperation, and usually result in reaching for that credit card to cover the cost. A cycle that leads you deeper in to debt.
Sinking Funds Categories
There is no limit to how many sinking funds you can have.
This will largely depend on your family, and your priorities.
We are working to get out of debt, so we don’t have very many sinking funds right now.
The majority of our “disposable” income goes to debt, but we do keep a few sinking funds to prevent having to dip in to our $1000 emergency fund.
Related: How to Save 00 in Baby Step One
These are the only sinking funds that we have right now, while we are getting out of debt:
- Car Repairs
- Doctor’s Visits
- Christmas
We have older cars, so small repairs are extremely likely in our situation. We put about $100/month in our car sinking fund, and will probably stop once it reaches $500. This will cover a tire or battery problem, and we will still have our $1000 emergency fund just in case.
With cold and flu season right around the corner, and the fact that we have three children, we have deemed it necessary to put aside $100/month for doctor’s visits. This will cover the majority of the sick visit if needed. Again, once we have about $500 in this fund, we will probably let it sit, knowing we also have our $1000 emergency fund as well.
Other Sinking Fund Categories that you might include:
- Back to School
- Auto Insurance
- Homeowner’s/Renter’s Insurance
- Life Insurance
- Disability Insurance
- Halloween Costumes
- Vacations and Travel
- Thanksgiving Dinner
- Doctor Visits (Eye, Well Checks, Dentist)
- Pets
- Furniture
- Electronics
Related Post: How to Use Cash Envelopes
Sinking Funds Examples
For example, let’s just jump back to Christmas (or any holiday), because it’s one of the easiest sinking funds to jump on board with.
Let’s say you want to spend $1000 on Christmas this year. This will be your Christmas budget for everything from gifts, food, and decorations.
If you make $4000/month, it will probably be difficult to cash flow $1000 for Christmas out of your December budget.
This will lead to stress and unhealthy decisions like turning to credit cards and debt to make Christmas work.
If you started saving in January, you would only need to put aside $83/month.
This is much easier to do, than cash flowing the entire $1000 in one month.
Every month, when you sit down to do your budget, you will put $83 in to your Christmas sinking fund.
If you’re late to the party, you can start this in June or even October! Obviously, increasing what you put aside each month (or decreasing what you spend on Christmas).
Just make sure you are committed to sticking to your budget, and promise yourself that you will not dig in to the designated sinking fund for anything other than Christmas.
Should you have Sinking Funds when you’re trying to pay off debt?
If you are trying to pay off debt, you will want to put as much money as you possibly can toward your debt each month.
This means you will probably not have quite as many sinking fund categories as a person with no debt.
You probably won’t have categories like vacation, new furniture, or other “fun” purchases, but you simply can’t neglect saving for Christmas, back to school, or doctor visits.
It will be up to you and your situation, to decide how many sinking funds you need.
Committing to a monthly family budget meeting, can be a great way to decide where every dollar will go each month, and will help everyone stay on the same page with your family’s financial goals.
More on debt:
How to Stay Motivated Paying Off Debt
The Debt Snowball Method for Large Debt
Should You Pay Off Debt or Save?
Does this help you understand sinking funds a little better? What else could I include in this post, to help you learn how to use sinking funds?
Don’t forget to pick up my free budgeting printables that include printable cash envelopes that you can use to set up and save up for your sinking fund categories!
What sinking funds do you have in your budget? Let me know in the comments, and thanks for reading!
Wow! I didn’t even know that sinking funds were a thing. Thanks! I’m gonna try it out of my next big-mini purchase!
Author
Glad this was helpful! Let me know how it goes, or if you have questions. 🙂