Everything You Need to Know about Sinking Funds

There are many tools and methods to help you save money. If you’re anything like me, a natural spender, the traditional answer to “how to save money” isn’t going to cut it. Have you ever had a large expense come up that you weren’t prepared for even though you knew it was coming? Or you put it in your budget and have to pay out a large amount at once? Did you feel conflicted because even though you have an emergency fund these weren’t exactly emergencies?

You need sinking funds.

In this post I will explain to you what sinking funds are, why you need them, how to use them, and share my personal experiences of how I use sinking funds in my budget.

Let’s dive in!

WHAT ARE SINKING FUNDS?

A sinking fund is money that you set aside over time upcoming known expenses and events. It is established by defining your categories and setting aside a little money at a determined frequency for those categories. 

For example, as I was saying above, you have a large expense coming up that is not an emergency, such as agreeing to be in your friend’s wedding. Instead of dishing out large lump sums of cash from your budget at the time, you can save early and often to build a fund for the sole purpose of being a reliable wedding party member. The engagement party gift? Paid for. Your share of the bridal shower/bachelorette weekend. Already accounted for. Your hair, makeup, nails, shoes, and dress? Not a problem. Your wedding gift? Done. All stress free and drama free (well the money part) because you prepared with a sinking fund.

WHY DO YOU NEED SINKING FUNDS?

You need sinking funds simply because life happens and can throw off your plans. You may plan to budget for your mom’s birthday celebration, but then you start having car problems. Is the car an emergency? Possibly. But, you can avoid it being an emergency and make it more of an inconvenience when you have a sinking fund for car maintenance.

BUT WHY CAN’T I JUST USE MY EMERGENCY FUND?

You can do whatever you want. That’s the beauty of personal finance– it’s PERSONAL. However, you want to differentiate between an emergency and something that just comes up because you will deplete your emergency fund fast if you don’t. 

With a sinking fund, you expect the expense to occur. Whether it’s a holiday, annual subscription or service, or planned maintenance, you know it will come so you prepare for it. Emergencies are the complete opposite. Unforeseen, unexpected, and need fast action on your part.

HOW DO YOU USE A SINKING FUND?

First you will start with your categories. There is no set rule on what categories you should have sinking funds for or how many. You choose as many as you need to fit your lifestyle. Some examples are:

  • Holidays
  • Back to school
  • Birthdays 
  • Car maintenance
  • Annual insurance premiums
  • Pet care
  • House expenses
  • Wedding
  • Travel
  • New car

Once you establish your categories, determine how much you need to save for them and when. Next, determine where you will keep them. Some people use checking accounts, savings accounts, or they pull out cash and keep them stored until they need them.

HOW I USE SINKING FUNDS

First, I’ll say I LOVE sinking funds. When I first found out about them and how to use them properly it was a game changer for my budget. We keep our sinking funds in high yield savings accounts which we are able to label and break down further into subcategories. Our 2021 sinking funds and their subcategories are:

  • House fund: home improvement projects
  • Car maintenance: registration, planned maintenance, unplanned maintenance, license renewal
  • Christmas: our kids, nieces and nephews, decor, and activities
  • Baby expenses: clothing, diapers & wipes (outside of the weekly budget), and baby gear
  • Big kid expenses: clothing, sports registration/equipment, camp, school items/activities

We prioritize saving for our sinking funds based on the date they are needed. Our car maintenance fund is fully funded at the beginning of the year whereas our Christmas fund isn’t started until May each year. Baby and big kid expenses are funded throughout the year as we pull from them and replenish as needed.

I am a huge fan of sinking funds because it keeps me organized and on track with spending. I am completely okay with admitting without being organized down to the labels on my accounts I am a hot mess and will spend it. If you are the same way I strongly suggest setting up your sinking funds immediately and getting organized too! To stay motivated you can get the Money and Momming Sinking Funds Tracker. There is also a Christmas tracker and cash envelope available in the shop to start saving today!

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