What Are Sinking Funds (2024)

What if I told you that there was a budget strategy that is absolutely vital to helping you stay on budget, that can help reduce the stress in your budgets, and that makes sure you can cover unexpected expenses without dipping into your emergency fund? If it sounds impossible, it’s not. It’s simply a sinking fund!

What Are Sinking Funds

I get it. The term sinking fund sounds complex but put simply, it’s money that you set aside for a purpose at a later date.

For example, if you know that you will have to replace the tires on your car before winter comes, and you don’t want to pay for them out of the budget of one month, then you’d start setting aside money specifically for the tires. You’ve just created a sinking fund! Saving $50 per month over 10 months for replacement tires is a lot more feasible than a $500 expense all at once.

How Important Are Sinking Funds

I would argue that sinking funds are absolutely vital to your budget! As a matter of fact, I’m going to say they’re just as important as your emergency fund!

A few years ago, I had minimal sinking funds. My sinking funds consisted of a lump sum savings account {in other words, I had them all in the same savings account} with a $400 medical deductible, a small amount for clothing, $1,200 for vision expenses and a few hundred for non-monthly bills.

While I felt like we were able to pay down a lot in debt over those years, I also was constantly stressed because I was taking some expenses from our regular monthly budget that didn’t really need to be taken from there. I was constantly worried about not wanting to go over our budget.

After I started creating more sinking funds, our budget was less stressed. While the debt payments may not have been as large as I would have like them to be {part of this was because our medical insurance contributions and out of pocket costs have changed as well}, but any unexpected costs were able to be covered within our expanded sinking funds. That in and of itself has helped make our budget experience a lot more joyful.

How Do I Determine My Sinking Funds?

This will vary for every individual budget. I know this isn’t really the answer that you’re looking for, but it’s the best answer I’ve got!

Start by looking through old bank statements to determine which transactions you could have prepared for. As you’re going through them, be sure to note when the transaction took place, what the expense was for, and how much it cost.

Some common sinking funds can include:

• Car Maintenance & Repairs – oil changes, inspection, new tires, etc.
• Medical Expenses – copays, prescriptions, deductible costs, etc.
• Dental & Vision – if you don’t have insurance, you’ll want to know an average cost per year for cleanings and exams, and save up for them throughout the year.
• Annual Expenses – taxes, HOA dues, insurance, etc
• Home Expenses – any minor upgrades or maintenance, to bigger expenses like appliance replacements
• Gifts – holidays, birthdays, weddings, graduation, etc
• Vacations
• School Expenses – back to school expenses, fundraisers, field trips, etc

That’s just a start to some of the sinking funds you could have in your budget. But inevitably there are some that do slip through the cracks. To minimize this, check out my post on how to determine your budget categories, and see if any of those categories could qualify as sinking funds for your budget.

How Much Do I Put In My Sinking Funds?

Just like with what sinking funds you should have, this will depend on what you are saving for. It’s always a good idea to have a ballpark estimate of what needs to be saved. And it’s even better if you overestimate some of the expenses.

For example, we get our septic pumped every two years. For that sinking fund, I know it’s going to cost between $250 and $300, so I err on the side of caution and save up $300. When the time comes, and I’ve only spent $250 of my sinking fund, I either send the remainder to debt or add it to a sinking fund that could use the extra help.

When Do I Start My Sinking Funds?

Personally, the sooner you can start them the better! I find that if I start my sinking funds too soon, I may borrow from it for another category or fund, and I don’t want to do that.

But there are no steadfast rules on exactly when you need to start a sinking fund. Start them whenever you feel comfortable!

For a sinking fund for our septic maintenance, I start it about 6 months before I plan on having our septic pumped {around October or November}.

For our back-to-school sinking fund, I start it in March. It gives me enough time to save up some decent money before school starts, as well as catching some clearance clothing deals and early back to school deals.

For our medical sinking fund, I start them in January every year – simply because it’s when our deductible resets.

For a sinking fund we have for Hubs’ company truck, I start it in November – that’s when they assess his personal mileage and take that usage from his paycheck.

How Do I Keep Track Of My Sinking Funds?

You can keep track of it with a simple bar graph, a tally on a whiteboard… whatever works for you!

I personally like to keep track of my sinking funds in my budget planner.

When we were paid weekly, I used my 52 week savings tracker to show me how I am progressing towards my savings goal. Now that we’re paid monthly, I use the sinking fund tracker in my budget planner.