Five Sinking Funds Every Budget Needs
You know that sinking feeling when you are faced with an unexpected expense you can’t afford? Like the time the A/C unit in your home quit working and it cost $6,000 to replace? Or the time your son broke his arm and you ended up shelling out hundreds to the orthopedic surgeon? Or that panic that ensued when your car broke down and needed an alternator replaced?
Panic no more.
With sinking funds, you can kiss that panicked feeling goodbye.
In this blog post, I’ll talk about what sinking funds are, why you need one, and how to set them up and manage them. I’ll also talk about the sinking funds I personally use, common categories for sinking funds, and 5 sinking funds every budget needs. Ready? Let’s get started!
What is a Sinking Fund?
A sinking fund is a way to save up a big chunk of money by setting aside a little bit at a time, over an extended period of time.
It’s a way of saving up for expected, yet unknown, expenses.
For example, you know you’re going to need to replace the tires on your car at some point, you just don’t know when, or how much it’ll be. You know you’re going to have medical and dental costs throughout the year; the question is just when and how much?
Why You Need a Sinking Fund
Your regular budget is designed to cover expenses on a monthly basis. But, some expenses only occur on an irregular, annual, or unpredictable basis (hello, federal income taxes and car repairs). The sinking fund allows you to save a large amount over an extended period of time, making it easy to cover those large expenses, when they hit.
With a sinking fund in place, you’ll have the money available to pay for those irregular expenses when they occur, without stress or worry.
For example, not too long ago, it was raining heavily and I hydroplaned on the highway. (Side note: if you ever hydroplaned before, you know it is TERRIFYING). When it rained again a few days later and I had such poor traction, I knew it was time for new tires.
I headed into the tire shop to get them all replaced and the total was $813.36. Over $800 for four new tires! Yikes. That’s a lot.
RELATED: Five Tips for Saving on Car Repairs
You may remember this pic from Instagram if you’ve been a long-time follower.
Who has an extra $800 lying around? Anyone?
Well, I did.
Because I keep a sinking fund for car repairs.
The money to cover the repairs was in my sinking fund, and all I had to do was hand over my debit card with total peace of mind, and walk away with four new quality tires.
I didn’t have to settle for the cheapo tires because that’s all I could afford.
I didn’t have to resort to pulling out a credit card, digging myself deeper into debt.
No stress. No worry. No headache. No arguments.
But this is only because each month, I add money to a sinking fund dedicated specifically for car maintenance and repair. (I get expense checks for work on a monthly basis because I drive a lot for work to meetings and such. Each check I get, I save in a sinking fund specifically for car repairs).
How I Manage my Sinking Funds
I keep the money for all my sinking funds in my regular bank account. You can also keep your sinking funds in a separate savings account that isn’t linked to your checking account if you don’t feel you have the discipline to stay away from spending the money in your sinking funds.
I manage my sinking funds with an app called Envelopes Budget Manager. It’s one of the only apps I’ve ever paid for (I’m all about free apps), but it is worth every penny.
With this app, you can create virtual envelopes and divide your money into each of them. When you spend, you manually deduct the money from your virtual envelope. I love that the process is manual, because it allows (and forces!) me to be in charge of my money. Plus, I don’t have to give any third parties access to my bank account, which I’m always a little wary of. If you prefer automated budget trackers that link to your bank account, this isn’t the tool for you.
At a moment’s glance, you’ll know how much money is in each of your sinking funds. (I manage all my money this way, by the way, not just my sinking funds).
The pic above shows a screenshot from the app, that shows two of my sinking funds: Medical/Dental and Birthdays. Birthdays was getting kinda low when I took this screenshot!
Obviously, you should periodically “balance” your virtual envelopes against your bank account to make sure the total in your envelopes matches the total in your bank account.
How To Decide How Much to Put in Each Sinking Fund
Ideally, you would know how much you spend on any given category in a year, divide it by 12, and put that much into your sinking fund each month. This is one reason it’s so important to track your spending. If you don’t know, you can review past bank statements or make your best educated guess. But start tracking your spending now, so your budgeting process will get easier as you go along.
For some irregular bills, you will know exactly how much it will be. Take the full amount of the bill and divide it by the number of months you have left to save. Then save that amount each month.
For example, let’s say its January and your auto insurance premiums of $750 are due in May. You have 5 months to save for that bill. $750 divided by 5 = $150. Put $150 aside each month from now until May, and your premiums will be covered. You can break it down even further by paycheck. If you get paid twice a month, set aside $75 each pay day. $75 each pay day is a lot easier to handle than having to come up with $750 all at once, right?
The Five Sinking Funds I Use
I include sinking funds in every single budget I make. I have five sinking funds that I use at all times:
Medical/Dental/Vision
Homeowner’s Dues
Christmas (if you celebrate)
Birthdays/Other Gifts
Car Repair/Maintenance
I add between $50-100/month to each of these categories. My Christmas sinking fund is heftier. I add $100/payday to this fund. When Christmas rolls around, I have $2,400 to spend guiltlessly on my loved ones. There’s no better shopping than guilt-free shopping, let me tell ya!
The Five Sinking Funds Everyone Should Have
Everyone should have some sinking funds in place. Here are the ones I recommend you have:
Medical/Dental/Vision. You are going to have annual checkups, prescriptions, co-pays, twice yearly dental cleanings, yearly vision exams, and maybe even an unexpected cavity, or God forbid, visit to the ER. Be prepared for these expenses with your sinking fund.
Birthdays/Other Gifts. I don’t know about you, but my kid gets invited to no fewer than 437 birthday parties a year. I never know when they’re going to hit, but the cost of gifts for all of his friends can certainly add up. I also use this fund for any other unexpected gifts that may arise during the year including weddings and baby showers and house warming parties. Having this sinking fund in place makes life so worry free when unanticipated celebrations arise.
Christmas. Newsflash: Christmas falls on December 25 this year! Are you still recovering from all the spending you did last Christmas? You’ve got all year long to save for Christmas, and, unlike other emergencies, you KNOW when this one is going to occur! Take some time to figure out how much you spent on Christmas last year. Take that figure, divide it by 12, and put that amount in a sinking fund each month. When the holidays roll around this year, you’ll have a nice pile of cash to shop with, without guilt and without succumbing to using credit.
Car Repairs. See my story above. Repairs are going to happen. Oil changes, tire replacement, and general repairs can be paid for with ease out of this fund, preventing a crisis and preventing you from succumbing to using credit.
RELATED: Five Tips For Saving on Car Repairs.
Emergency Fund. While not a true sinking fund per se, an emergency fund can be a type of sinking fund, particularly for those who don’t have one and are just starting out. And, everyone needs an emergency fund at all times.
Even if you’re still paying off debt.
Yes, you.
You need an emergency fund.
I know some experts recommend $1,000 starter emergency fund, but honestly, that doesn’t go far. Stop and think about how far that would get you in a crisis. It doesn’t even cover my mortgage. I recommend keeping at least one month of income on hand to cover any unexpected expenses. Once you have at least $1,000 saved up, you can start to aggressively tackle your debt. But then, continue to contribute to your emergency fund bit by bit, even while you’re paying off debt. Commit to setting aside $100 or $50 or even $20 each payday into your emergency fund, and keep adding to it until you hit a month’s worth of living expenses. (I already have a sinking fund equal to 2 month’s expenses, so I don’t currently save for an emergency fund at this time, and instead focus on paying off debt).
Other Sinking Funds to Consider
Here are some other sinking funds to consider setting up:
Homeowner’s Association Dues
Car Replacement
Home Maintenance and Repairs
Auto Insurance Premiums (if paid annually or semi-annually)
Property Taxes (if you don’t escrow)
Income Taxes
Computer Replacement
Cell Phone Replacement
Life Insurance Premiums (if paid annually or semi-annually)
Car Registration
Vacation
Kids’ Sports and Activities
School Tuition
Daycare costs (especially if your child only goes to daycare in the summer, like mine).
Amazon Prime Membership
Warehouse Memberships (Costco or Sam’s)
Use this list as a starting point to put together the sinking funds you need. You can change up your sinking funds each month based on what bills are due and how much you have to budget. After you’ve been saving in your sinking funds for a while, the bigger expenses will be easier to handle, and will be less of a headache.
I hope this helps you tackle some of your big expenses and reduces the stress of managing your money somewhat!
If you have any questions about sinking funds, leave them in the comments below, and I’ll do my best to answer them.
If you like what you see, please pin it on Pinterest to share with your friends!
You may also be interested in:
