Do you pay your car insurance annually?
Do you have an upcoming trip you need to save for?
Do you need to pay your car registration in 6 months?
If you answered yes, you should have sinking funds.
Do you want to save for potential vet visits for your pet?
Do you want to save for traveling in the future?
Do you want to save for any upcoming house or car repairs?
If you answered yes, you should have sinking funds.
I am going to cover everything there is to know about sinking funds, what sinking funds are in my budget, and how to use them.
Don’t forget to check out my free resources (there might be a free sinking funds tracker)
What are sinking funds?
A sinking fund is money you save each month towards a one time or predetermined future expense.
You set aside money each month (or each week) towards a larger financial expense. This way, you are not scrambling to find the money or add to your debt when you need it.
Types of sinking funds
You can have specific sinking funds for expenses you know reoccur or you know the exact amount you need like:
- car insurance
- car registration
- homeowner’s/renter’s insurance
- upcoming family event or trip
- recurring members (ex: Amazon Prime)
- school tuition or fees
In these situations, you have an estimate of how much you need for this expense and you will save monthly until you reach that amount.
You can also have general sinking funds for expenses you expect to occur, but you aren’t sure the exact amount:
- home or car repairs
- future trips or events
- medical expenses
My Current Sinking Funds
I have a mix of specific sinking funds and general sinking funds. Currently I am saving for:
- Joe’s Truck Insurance
- DJ (our dog)
- Homeowner’s Insurance
- Alli’s Car Registration
- Alli’s “New” Car
- House Down Payment
Sinking Fund vs. Emergency Fund
You need both sinking funds and an emergency fund. An emergency fund is for emergencies. You have no idea when you will need it and you do not control the amount.
With sinking funds, you can plan for an upcoming expense. You won’t need to take money from your emergency fund to cover the expense. With sinking funds you have a specific target amount and/or purpose for this money.
It is so important to have both an emergency fund and various sinking funds.
How Do You Set the Amount?
There are two ways to determine how much you need in your sinking fund.
1. Fixed Amount for a Specific Expense
If you know your car insurance was $1,200 last year you can assume it will be around that this year (unless you had accidents or other changes). You need to decide how long you want to save for to reach the goal of saving $1,200.
Let’s say you have a year to save for your car insurance ($1,200):
If you divide $1,200/12 months, you need to save $100/mo for the entire year to have the full amount
If you divide $1,200/6 months, you need to save $200/mo for six months out of the year
If you divide $1,200/3 months, you need to save $400/mo for 3 months out of the year
Based on those numbers, you can decide what works best for your budget. Maybe saving for the entire year is too much because you have a lot of other sinking funds so you decide you will save from June-Dec and save $200/mo to reach the goal of $1,200.
If you need help determining your sinking funds and savings goals or you feel stuck, I cover this and more in my group coaching program so check it out.
2. Variable Amount for a Future Expense
Maybe you want to save for future repairs, but you have no idea what you will need. You will just feel better having money saved for repairs, so you don’t need to take from your emergency fund.
After paying all of your bills and making extra debt payments (if you have debt), let’s say you have $500 every month that you can apply towards savings.
You have a fully funded emergency fund so you are not worried about contributing to that fund. If you don’t you can put part of the $500 towards your emergency fund until it is at an amount you are comfortable with.
You decide to divide the $500 left into sinking funds:
- $100 for travel
- $150 for pets
- $200 for repairs
- $50 for clothes
At the end of the year, if you didn’t need to use these sinking funds, you would have:
- $1,200 for travel
- $1,800 for pets
- $2,400 for repairs
- $600 for clothes
This money would allow you to repair your car, go on a trip, pay for the unexpected vet bill, and buy yourself new clothes without affecting the amount in your emergency fund or your regular monthly budget. This will help you feel less stressed and definitely will reduce financial anxiety around unexpected expenses.
Where Do You Keep Your Sinking Funds?
Some people keep their sinking funds in cash envelopes but I do not use cash envelopes and it also worries me to leave that much cash in my house at one time. If you want to keep some in cash envelopes, do it! Do whatever works for you.
I keep my sinking funds in a high yield savings account, specifically Ally Bank. Ally recently introduced buckets which are digital envelopes. They allow you to split up your savings into different categories without opening multiple savings accounts. You can create up to 10 different buckets.
My favorite part is you’ll still earn interest on the total balance of the account (meaning all of your buckets combined) so you are not losing out on the compound interest. You will make more money than if you had separate savings accounts for each bucket.
Why I Love Sinking Funds
Sinking funds help you reduce financial anxiety and save for things you value. Do you want to go on a trip while paying off debt and saving for the future? Do it! Set up a sinking fund and save for that trip so you can pay with cash (and rewards points if you use credit cards).
Make sure to include your sinking funds in your budget.
Set goals. Create a plan. You will see results.
Do you have questions about sinking funds? Send me an email or leave a comment below!