Sinking Funds: The Secret to a Successful Budget & Reducing Financial Stress (2024)

Sinking funds are the secret to a successful budget. Reduce your financial stress by including sinking fund categories in your budget.

Do you dread the months when you have to make a big purchase? You know what I’m talking about – the months where you have to pay for new tires on your car, purchase plane tickets for your annual vacation, or buy holiday presents for your long list?

During those months, I would scramble for money, stress about my bank account balance, and hope that I wouldn’t have to go into debt.

But then I learned about sinking funds. They have simply transformed my budget and eliminated any fear I had of paying for large expenses.

Sinking funds are a game-changer for your budget and this guide will you set up and track your sinking funds.

What is a sinking fund?

A sinking fund is a savings budget category and fund that provides a way to periodically save money for infrequent or irregular expenses.

Sinking funds are a way to break up your savings throughout the year so that you are not hit with a fat, scary bill that you can’t afford to pay. They help you pay for necessary expenses, even though the expenses aren’t necessary right now. You set aside money each month as part of your basic monthly budget.

For example, every January you may have to pay annual Home Owners’ Associate fees. Let’s say the fees are $1,200. Finding $1,200 in your January budget is going to be hard – that’s a lot of money to pay and the big dent in your monthly budget may cause stress and strain on other budget categories. However, if you create a sinking fund for HOA fees, you would save $100/month throughout the year (not a big impact on your monthly budget) and by January, you would already have the money set aside for the big HOA fees. No stressing, no worrying, and definitely no going into debt for the large expense.

Sinking funds work for known, infrequent expenses like HOA fees, but they also work for anticipated irregular expenses where you don’t know the exact cost like back-to-school clothing, car maintenance, and technology repair.

Why do you need a sinking fund?

If each month you feel like there is another major expenses that destroys your budget, you will greatly benefit from the use of sinking funds. These are the ways that I think sinking funds will help you manage your money:

Reduces financial stress and the surprise of large purchases

Month after month you feel hit with yet another must-have large purchase that throws away the hard work of your budget. That’s a pretty common feeling.

Sinking funds will stop that feeling altogether. You put a little bit of money each month into your various sinking funds so that you won’t feel stressed, surprised, or concerned about an upcoming expense.

Eliminates scrambling for money

Drastically different expenses from month to month can cause you to work a lot harder on your budget than necessary. Without sinking funds, each month you try to rework your budget to accommodate the latest problem/expense. This causes you to mess around with your budget categories which takes time and brain power.

Sinking funds spread the cost of your large expenses throughout the year. Instead of paying a $1,200 fee once a year, you save up $100 each month in a sinking fund. A $100 expense each month is a lot easier to handle than a $1,200 expense once a year.

Sinking funds help you create a consistent and predictable budget each month. It prevents expenses from creeping up. It eliminates scrambling for extra cash.

Helps you feel in control of your finances

Incorporating sinking funds into your budget is a proactive approach to managing your money. You are acknowledging and planning for your future financial needs. This helps you feel in control of your finances instead of a victim of your finances.

You’ll pay bills on time

Since you are saving throughout the year for irregular, infrequent expenses, you’ll always have the money in your account when the bill comes.

Prevents you from going into debt

Without planning and saving for big purchases, it’s very possible you won’t have the money when the bill arrives. In the past, you may have gone into debt to cover the expense. Maybe you asked your family for some money or maybe you carried a balance on your credit card. With sinking funds, the money is in your account and you won’t have to go in debt.

The sinking fund categories you should set up

There are a core set of sinking funds that almost every budget needs. These are the large expenses that are hard for anyone to escape.

There are also optional sinking funds that you might want to consider incorporating into your budget.

Because everyone’s budget is going to be different, everyone’s sinking funds are going to be different.

The sinking funds can be as detailed or as general as you want. Some people may choose to have one sinking fund for “gifts”. Detailed oriented people may split up their gift giving into several sinking funds like “holidays”, “birthdays”, “anniversaries”, etc. You can have as many or as few sinking funds as you want.

Sinking fund categories every budget needs

• Car maintenance (tires, brakes, oil changes, scheduled maintenance, car repairs).This is a common sinking fund that can be split even further if you want to have a separate fund for tires or for scheduled maintenance
• Household maintenance/repairs (air filters, light bulbs, shovels, pest control, yard maintenance, appliance replacement, etc.)
• Travel/Vacation. You can even split this between annual vacation and trips back home to visit family during the holidays or summer.
• Clothing.You likely don’t spend the same amount of money each month on clothing. So save up each month for when you have a big shopping trip (like back to school time)
• Medical expenses (co-pays, prescriptions, contacts/glasses, eye exams, vitamins, chiropractor visits, etc.)

Optional sinking fund categories to set up, if applicable

• Gifts. You can split this up between holidays/Christmas, birthdays, and anniversaries
• Pets. Vet visits can be expensive. You may also be saving for a pet, or saving up for pet medication.
• Car insurance. If you pay this every 6 months or every year, it’s helpful to set up sinking funds. This is not necessary if you pay your car insurance monthly.
• Property tax. If you don’t have an escrow account with your mortgage lender, then you can save up throughout the year with a sinking fund.
• Property insurance. You can also use sinking funds if you have to pay property taxes on your car (depends on the state you live in) or other property insurance
• Home Owner’s Association fees. Don’t get surprised by that annual fee anymore.
• Holidays. While gifts are typically the major expense during holidays, food and décor can also add up so it’s helpful to save throughout the year.
• Dental. If you don’t have dental insurance, cleanings can be expensive. This can also be used to save up for braces or teeth whitening.
• School tuition. Whether this is your own college tuition or your child’s private school tuition, save up now so you don’t have to scramble for money at the beginning of the semester.
• Rental repairs. Be prepared financially for when something goes wrong at your rental property.
• Family pictures. If you know that you want to get family pictures every year, start saving now.
• Kids activities. Save for sports fees, field trips, or other unexpected kid expenses
• Weddings. Are you saving up for your own wedding? Or maybe this could be used to attend your friends’ and families’ weddings.
• Saving up for a car. Wanting to buy a new/used car? Well, you likely won’t be able to pull thousands of dollars out of your pocket so start saving now for a car.
• Saving up for down payment on house. Purchasing a house is exciting…and expensive. Start saving monthly for one of the largest purchases of your life!
• Hosting/Parties (kids parties, anniversaries, wedding showers, baby showers). Do you love to host parties? Start saving money for it now so hosting can remain fun and doesn’t become a financial burden.
• House decorating. Save up now so when inspiration hits, you’ve got the money!
• Business taxes. Save up each month for those required quarterly taxes.
• Any large item you want to buy. Do you want to build a fence around your property? If so, start saving each month with a sinking fund.

How much to put in each sinking fund

Now that you know which sinking funds you want to incorporate into your budget, you need to determine how much money your sinking fund needs and how much money you will put into it each month.

Let’s do some math to determine how much money to put into each sinking fund:

1. Determine the total amount of money you want saved in each sinking funds

For each sinking fund, determine how much money you want or need saved. If you want to have $5,000 in your travel fund, then you need to save $5,000. If you want to take family pictures, then you can estimate $200 (or whatever your best guess is) to save in your sinking fund.

Some expenses are fixed – you know the exact amount you need – these are easy sinking funds to set up. However, there are some variable expenses – you don’t know when they will happen or how much they will cost. For variable expenses, you need to make an educated guess on how much to save.

2. Determine the date you need the money saved by

For some sinking funds, you know the exact date of when you need to make the purchase. Your HOA fees may be due in January each year. Your car insurance is due in May and December. You want to build the fence around your house in the summer. Write down the month that you anticipate needing the money.

3. Determine how many months you have until the date you want it saved by

Now that you know when your bill is due (step 2), you can determine how many months you have to save up for it. If you are setting up your sinking funds in January for family pictures that you want to take in June, then you have five months to save up the money.

4. Divide step 1 by step 3

If family pictures will cost $200 and you have 5 months to save up for them, simply divide $200 by 5 months. You will have to put $40 each month into your sinking fund.

NOTE! Setting up sinking funds gets so much easier the longer you do it. Eventually, for many of your annual expenses, you will simply have to divide the total amount you want by 12. For the family pictures example, you will simply divide $200/12 and you will save $17 each month.

5. Stop saving when you’ve reached the total amount

Once you’ve reached the total amount you wanted for the sinking fund (decided in step 1), you can stop saving money towards it each month. However, for certain sinking funds, once you spend the money you will need to start feeding the fund again.

Where to put your sinking fund

There are three main ways to store your sinking funds. The common characteristics of all these methods is that they are saved in a different place than your daily checking account. The three ways include:

One large checking or savings accounts (one account that combines all your sinking funds)

You can have one large account that combines all of your sinking funds. Your bank may have an online feature that allows you to have “little pockets” to section off your account balance. If this is the case, you can label each section after the sinking fund it represents.

If your bank doesn’t allow you to add pockets to your account, tracking the balance will be very important (see the next section).

Several small checking or savings accounts (one for each sinking fund)

If your bank allows you to have multiple checking and savings accounts, you can have an account for each sinking fund.

Remember to check if there is a limit to the number of transfers you can do each month. If your bank has a limit, this probably isn’t the best method for you.

Cash

Another options is to withdraw cash each month and keep the money your sinking funds at home. You may want to invest in a safe if you choose this method. This method allows the easiest access to your sinking fund savings. However, if you think you may be tempted to take the cash and make an impulse purchase, this may not be the best method for you.

How to track the balance of your sinking funds

If you have a separate checking or savings account for each sinking fund, your bank tracks the balance for you. This is the easiest way, especially if you bank allows you to change the name of each account to match the name of your sinking fund.

Alternatively, if you have one large account that combines all of your sinking funds, you can track the balance in an excel spreadsheet or the old fashioned way of pen and paper. In both cases, make sure that the total amount in your bank account matches the sum of all the individual sinking fund balances (check this each month).

If you keep your sinking funds in cash, then you can create envelopes for each fund and write the balance on the front of the envelope.

Sinking Funds vs Emergency Funds

Sinking funds are very different from emergency funds. Sinking funds are used for known infrequent or irregular expenses.

Emergency funds are for, well, emergencies. They are used for serious medical issues that were unforeseen or major house repairs not covered by insurance. Emergencies aren’t planned. Things in your sinking fund are planned – they are anticipated expenses. An emergency fund should never be used for an anticipated expense.

Sinking funds can help your budget

Sinking funds can save your budget. If you feel like you can’t get a handle on a consistent monthly budget because there’s always “that big expense”, sinking funds are your solution.

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You can tailor sinking funds to your exact needs – you can have a lot of sinking funds or a little. You can save for any future expenses you want – no matter how expensive or inexpensive the cost may be.

With sinking funds, there’s no more crossing fingers hoping that you can afford a big purchase. No more hoping that you won’t have to beg, borrow, and steal. No more hoping that you won’t go into debt.

Sinking funds will help you pay for the necessary expenses by saving a little each month. If you are new to sinking funds, then start with a few. Start opening sinking funds with the expenses that cause you the most stress (hello, car repairs!).

Do you use sinking funds in your budget? What sinking funds do you have?