What is a sinking fund?
If a budget gives you permission to spend…then a Sinking Fund gives you an opportunity to spend…and to spend BIG.
What is the meaning of a Sinking Fund?
A Sinking Fund is a strategy for you to set aside money each month. Money that will grow and accumulate over time. Want to go on that vacation? Remodel the bathroom? Save for a down payment on a house? Pay off those credit cards? Pay off those medical bills? Give generously?
How about those Unexpected Expenses? Things happen, right? The roof gets a leak. Your refrigerator breaks, You need new tires or you need to fix your lawn mower. A Sinking Fund will help you save for those unexpected things over time.
And, unless you win the lottery, all of those things need cash. And plenty of it. Cash, not a credit card.
How do sinking funds work?
Sinking Funds work like this: every month you set aside money, into multiple categories. That money is to be used at a future date.
Why multiple categories? Why not just 1 savings account? Let me ask you this..are you saving for more than 1 thing?
Here is an example. Let’s say you decide to save $500 a month. At the end of the year you have $6000! Score! You see that large amount and decide to renovate your bathroom. It looks amazing and you are so happy. Until summer rolls around and you want to go on vacation. Or your hot water heater breaks or you crack a tooth. Now what? You spent ALL of your savingsand there is nothing left.
This is where sinking funds in multiple categories work best.
Using the same $500 per month, set aside money into EACH Of your categories.
- $50 for car repairs
- $300 for new-to-you car
- $50 for medical expenses
- $100 for vacation
After a year you have.:
- $600 for car repairs
- $3,600 for new-to-you car
- $600 for medical expenses
- $1200 for vacation
What is a sinking fund used for?
Sinking funds = savings!
So now at the end of the year you and your spouse are thinking about buying a new-to-you car. You can either pay for a car with the $3,600 cash that you have saved, or use your car repairs sinking fund to make the needed repairs to your current car, and continue to save for another year.You would then have $7,200. Imagine if you started earlier…in 4 years you could have $14,400!
The beauty of having multiple sinking fund categories is this – you are now saving for multiple things. Your strategy has changed and your mindset changes with it. Rather than thinking car vs vacation….you can switch to car AND vacation.
How many sinking funds should you create?
- Unexpected expenses or your repair fund
- Large purchases: Car, remodel, or a vacation
- Non-monthly expenses: Insurance, Christmas presents, Birthday presents, or extra debt payments
How much should you save each month?
Let's say you want to take the family to Disney next summer. You gather information and have a really good idea how much that vacation will cost (I always suggest adding an additional 10% cause you KNOW you will go over). Let's say that it's $3000.
Anyway…count how many months there are until your travel. Let's say it's 10 months away.
Divide the $3000 by 10 and you now know that you need to put $300 each month into your Disney Sinking Fund. If that is too much for you to set aside you can delay the vacation a year, choose less expensive hotels, or go someplace else that does not cost as much money.
The goal here is to save ahead of time and pay cash. NO credit card bills to pay after the vacation is over!
Is a sinking fund the same as an emergency fund?
Sinking funds are NOT the same as an Emergency Fund. It is totally different. An emergency fund ismoney set aside for the unknown. A fully funded emergency fund gives you 3–6 months of expenses saved for any and all possible emergencies. Maybe you lose your job or someone gets really sick.
Look at it like this – What if your car needs new tires? With money in your sinking fund it won’t feel like an emergency—only an inconvenience. Why? Because you’re prepared with your repair and emergency funds. You have no way of knowing what things are coming or when they’ll happen. But, youdoknow thatlifehappens, so you have the money set aside and ready.
The sinking fund is for theknown. The emergency fund is for theunknown.
Where should you keep my Sinking Funds?
If you are using the Cash Budget System keep your sinking funds in your envelopes. I do recommend a locked safe 🙂
Or, in the bank in an account where you can withdraw immediately.A no minimum savings account would be perfect. You would need to manually keep track of each of your categories.
Or, if you are like me, and love electronic everything, try an online budgeting system. I recently switched to You Need a Budget (YNAB) and can’t say enough great things about it. Start out using it for your sinking funds…and then maybe eventually move everything over. YNAB is really easy. And their customer support is stellar!
So, what are you waiting for? What do YOU want to save up for? Need help with your budget? I got ya covered.
And, to help you out I create a FREE download for you. It is a Sinking Funds Tracker. Print out as many as you need. I suggest 1 for each fund. Enjoy and happy saving!
SINKING FUND TRACKERS
