What is a sinking fund?
Sink funds, not budgets! Unfortunately, your paycheck doesn’t just get bigger when you have a big expense due. You have to make the plan (aka the budget) to prepare for those months when your expenses might be bigger than your income. Sinking funds are a way to strategically put aside money in your budget for larger expected and unexpected costs. A common example is Christmas Gifts. We all know that Christmas is December 25 so no one should be surprised when December rolls around and suddenly we are spending more on Amazon than the typical month. A sinking fund makes sure these types of expenses have a place in our budget year-round. Sinking funds make sure your budget isn’t thrown for a loop and you feel prepared when those funds become due.
Why should you have sinking funds and not just savings?
Remember, a budget is what gives you permission to spend. If you just have a lump savings budget, there is nothing stopping you from spending it all on a luxe vacation even though your car insurance is due the very next month. A sinking fund will set up a protective dotted line that makes sure you spend on needs and wants accordingly. They should eliminate stress for large expenses and keep fun-spending fun.
How do sinking funds work?
Let’s use our example of a Christmas sinking fund and say we are starting our budget in January. Our goal is to have $2,000 set aside by November (when we start shopping). So, January – November = 11 Months. $2,000/11= $182 (rounded). In your budget, you are going to want to put aside $182 every month until you’re ready to shop in November.
What are some typical sinking funds?
Sinking funds come in different packages ranging from wants to needs and expected to not-so-expected. Here are some typical items you might want to work into your budget.
- Auto Maintenance
- Home Maintenance
- Medical Fund (Not to be confused with your Emergency Fund. Think of this as known upcoming costs like contacts, new glasses, braces, etc. Some people have this already created in the form of an FSA or HSA)
- Car Insurance
- Home/Renters Insurance
- Utilities (those pesky ones that are due every quarter or saving up for summer when the AC will be on overtime)
- Christmas/Holiday Gifts
- Birthday Gifts & Parties
- Pet Insurance & Medical
- Technology Replacement (new phones or computers)
- Yearly Subscriptions
- School (tuition, books, back-to-school supplies, and clothes)
- Kids (new baby, sports, clubs, classes, camp)
- Vacation (yay!)
- Taxes (April 15th)
- Bonus: Weddings! (Yours or others! Being a guest is expensive sometimes.)
Storing Sinking Funds
Sinking funds need to be in accounts that are readily accessible, unlike your Emergency Fund which should be a little harder to get to in a high-yield savings account. You can opt to create additional checking or savings accounts to help section off sums of money, but I recommend building your will power and budgeting expertise with most of the smaller funds. You should always be referencing your budget first for permission to spend, not your bank account. Download the Habitual Heary Zero-Based Budget Template and get started today. Alternatively, if you already feel comfortable with zero-based budgeting, I recommend YNAB for a great budget and sinking fund tracking app.
