I owe all my money management success to sinking funds. Without them, there’s no way we could have paid off over $70,000 in debt, including our house.
Sinking funds are mini emergency funds that hold a designated amount of money for expenses you know are coming. Setting aside money in each paycheck into a sinking fund is ideal for laying the groundwork for success when getting out of debt or preparing for future costs.
Want to know how some people never worry about money or bills? I am not talking about the uber-rich. I am talking about the everyday man and woman who have it all together.
I mean to have it all together. Not the people who LOOK like they have it all together. Not the “Jones’s.”
There are these mini emergency funds called sinking funds.
Sinking funds are just as significant as emergency funds, and they may save your emergency fund for an actual emergency!
They are separate savings accounts set aside for expenses you know are coming. This way, you can control impulse buying. It is a way for you not to spend money you don’t have.
You can save money – whatever amount that your family may need. But I have included the necessary sinking funds that are a must-have!
What Is A Sinking Fund?
A sinking fund is a set amount of money for a bill or life event that you know is coming.
A specific amount of money is aside every paycheck in an envelope, cash box, or savings account, and when it comes time to pay for that bill or life event, you already have the money set aside, ready and waiting. No stressing.
Having the money set aside for large bills or life events takes all the stress and anxiety out of those things for me.
A sinking fund is just a plan with a purpose to set aside a little bit of money for an expense you know is coming. Where an emergency fund is strictly for the little surprises life throws at you.
According to Dave Ramsey’s Every Dollar site, the sinking fund definition is:
“A sinking fund is merely a strategic way to save money by setting aside a little bit each month.”
And with researchers reporting that the average American saves just 3.8% of the income they bring home each month, we can confidently assume many people aren’t aware of the magic of the sinking fund.
If a budget offers permission to spend, a sinking fund encourages spending—and spending big”!
How Do These Separate Savings Accounts Work?
Each paycheck, we set aside an agreed-upon amount to put toward a significant expense — for example, my propane bill. Our propane company offers a prepaid plan at a discounted rate every year.
Instead of $1.97 a gallon, we prepay for whatever amount we choose and get propane for $1.47.
It usually takes us about $1200 for the winter. That includes our heat, hot water, dryer, and stove.
Because I will need $1200 at the end of March, I set aside $50 each pay period ($100 per month for several months), and preparing for that big bill will save us money in the long run.
These accounts avoid the panic that might set in about that time and have me scrambling around trying to find that $1200.
It’s about putting money aside for an expense you know is coming.
Also, if you have $200 set aside for clothes and that is all you have, it will stop you from making those unnecessary purchases because you are looking for that “feel good.” You know that $200 is all you have this season, and there is no credit card to put it on.
How Much Do I Put In My Sinking Fund Account?
You could go old school and do the math yourself, or use a sinking fund calculator like this one and just type in your numbers: Sinking Fund Calculator.
Why Do You Need To Set Aside Money?
You need them because it is good adulting to have one! They cover so many scenarios and help you prepare a significant money drop on the things you need (or want). Seriously, it’s just a good idea.
There are expected expenses that will come up. And it will offer peace of mind to have those expenses set aside and ready. Plus, if you set aside the money already, you will not need to put it on your credit card.
Sinking fund categories range from car insurance to tropical family getaways!
Having a sinking fund is a way to spread out a more significant payment over a certain number of months instead of coming up with a more considerable sum of money at one time.
It is also a way to prepare yourself for things that will come up anyway. For example, Car insurance is due on October 15. It costs you an extra $11 every month if you go on their payment plan.
But, if you set aside that additional $125 each month, you will save an extra $132 next October by paying in full!
Scout, the cat, will need to go to the vet. You know he goes once a year for a checkup and shots, but what happens if he gets a UTI and needs to go unexpectedly.
A vet visit like this could be an emergency, and you could take it out of the emergency fund, but you would be prepared and covered for a pet expense.
How To Create A Sinking Fund?
If you know the bill’s amount, you can do some simple math to figure that out. Say your water and sewer bill is $500 per year, and you get paid twice a month. You are just starting your sinking fund’s account, and you have four months until that money is due.
Getting paid twice a month will give you eight paychecks to save for that bill. $62.50 goes into that fund. I suggest rounding up to make life easier. I would put in $65.
Or, you can divide that amount by the number of months before it is due and then budget by paycheck.
Sometimes you don’t know how much you will need. If you are looking at a vacation fund, that will require a little added research and math.
You may have to check hotel and plane costs, admittance into parks, entertainment, and other activities, plus, account for all additional fees (parking and gratuities).
Add in food, car rental, and gas. Then, once you get to your number, add 20%! Because you never know what will go up and what you may have underestimated.
Where Do You Keep Your Money Stockpile?
Jordan from Fun, Cheap, Or Free talks about having seven separate savings accounts for each of her categories. Some people keep it in one bank account and have a spreadsheet to keep track of individual sinking funds.
You could also use an app like Mint or Every Dollar to do the same. The problem is that you will have to go through a little more work to get your funds. And if they are needed quickly, then it might be a challenge.
Some people choose to keep their sinking funds handy at home, safe, or in another hidden spot.
The tricky part about keeping the money at home is the threat of someone breaking in and taking it or some disaster happening (flood or fire), and then all that money might be gone. For you, this may or may not be a good idea.
Making proper precautions in either of these scenarios is the best bet. Finding the perfect home for your sinking funds will be a personal choice. There are no wrong answers.
When To Start Creating Essential Savings?
My answer would have to be yesterday. Maybe at the beginning of the year, when you read about financial goals for the new year.
But that won’t work for you, so start today. Just jump in where you are. Even if you can’t get your taxes sinking fund fully funded in time, every little bit will help when that bill comes due. Savings goals, no matter how small, will help in the end.
Start creating a sinking fund for that car repair right away. If you can get $200 set aside toward your car repair that is bound to happen, that is less money you will have to scramble around to try and come up with at the last minute.
That should relieve a little bit of stress off your shoulders.
Then, after you have an amount you are comfortable with, start immediately creating that sinking fund for next year. Because you know, those car repairs will need to be paid again next year.
What If You Don’t Have The Money For These Funds?
Start small. Put $10 away for Christmas each week. Find that big bill that stresses you out the most and fund that. And create a budget.
Starting small will give you the knowledge that you need to tell your money where to go before it is already gone. Do not stress more than you already are right now.
The purpose of essential sinking funds is to alleviate some of the stress you are already feeling. If you are stuck financially, considering getting ahold of a Financial Coach might be good.
They can help you through this season of life and give you some tools to dig out of this spot.
What Are Sinking Funds, Exactly?
Dave Ramsey coined the phrase years ago while developing Financial Peace University. It stems from those expenses that would sink your budget if you had not prepared.
There are two types of sinking funds in our house: Essential Sinking Funds and Sub Sinking Funds. Essential Sinking Funds are the primary and most critical sinking funds to have.
The Sub Sinking Funds are the smaller sinking fund categories under each essential sinking fund. They can have envelopes of their own, or you can combine them into just one account or envelope.
9 Essential Sinking Fund Categories
The Home Sinking Fund is the first essential sinking fund. Anything that has to happen in or to the home will fall under this fund.
As a renter or owner, you know that things will happen to the place where you spend most of your time. Prepare financially by putting aside not only needs for the home but wants.
When you want to spruce up your home with a new rocking chair for the porch, fresh paint for the bathroom, or a new comforter for your daughter’s r, don’t forget those pesky home repairs like leaky faucets or a patched bedroom wall.
- Maintenance and Home Repairs
- Home/Life Insurance
- Quarterly Utility Bills
- New furniture/ appliances/decor
- Outside decor/flowers/furniture
Car Sinking Fund
Anything that has to do with your vehicle comes out of this necessary sinking fund. From insurance to oil changes and car washes, this is where it happens.
I do not wash my car in the winter. It would just freeze my doors shut. But, when it is nice weather, I like to have it cleaned at least once (more like twice) a month.
That includes inside and out. Also, driver’s license renewal and inspections and everything for recreational vehicles hangs out in this car sinking fund.
- Maintenance and repairs
- Licenses and Registrations
- Fees for boats/ campers/ snowmobiles/ motorcycles
- New Cars
I love to give. I am a giver. This essential sinking fund category allows me to share without the money coming from someplace else.
Having this gift fund gives me peace of mind to pick up that adorable personalized baby blanket for my friend Lindsey who just had a beautiful baby girl, without taking it from the emergency fund.
- Other Holidays (Easter, Valentine’s Day, Groundhog Day???)
Indeed, this is optional. If you don’t have children, you don’t need this essential sinking fund. But if you do, you know this is a must.
Kids can be expensive, especially if they are involved in many sports and activities, not so much if they are introverts and like to read.
It is always good to have a subcategory for miscellaneous things for kids, especially as they get older and need class rings, graduation gowns, and prom flowers!
- School tuition
- Fees for sports
- Activities/field trips
- Back to school supplies
- Clothes and shoes
Whether you have great insurance, mediocre insurance, or no insurance, an essential sinking fund for medical is necessary.
Nobody will get through life without needing something. Keep some money aside for Nyquil when your husband comes down with a cold or new glasses for yourself. It will help alleviate the pain.
- Over the counter medicines
- Dentist visits
- Eye doctor/ glasses/ contacts
The other sinking fund category is optional. But if you do have a pet, I strongly urge you to consider a well-padded sinking fund for your fur baby.
If a loved pet gets sick, they are not cheap to make better. Show some love to that baby and set up a particular account to take care of her.
- Spa Day/ daycare/ boarding
The personal category is everything else that pertains to you personally. This essential sinking fund would pay for things you need, want, or enjoy.
You know the one. The phone costs $1,000!!!! Saving for it and paying cash is better than financing it! It will also keep you from financing that new iPhone X that you want because it takes the best pictures.
- Hair cuts
This one is HUGE for me. As a Finance Coach and a frugalista, I see this every year. People panic because they haven’t finished (or started) their Christmas shopping yet, and Christmas is next week.
They won’t pay the electric bill or the phone bill in November or December because they don’t have the money to shop for Christmas AND pay bills.
People, I say this with the utmost love in my heart…EVERY. YEAR. SAME. TIME. SAME. PLACE!!!
Imagine if you were to put $100 per month in a sinking fund? That is $1200 a year toward gifts you don’t have to pull out of your ear at the last minute! How great would that be for your Christmas spirit?!?!
Whether you plan a cruise for the entire family during spring break, send your son to Europe on a school trip, or go camping a few times in the summer, you might want a sinking fund.
Putting aside some money in the vital sinking fund for travel will stop any last-minute cancelations due to the LACK of Funds! And it will allow you to enjoy your time away.
If you were to separate these into individual sinking fund categories, there would be over 38 funds. That is a lot. And if you are the kind of person who enjoys micromanaging, I say go for it.
But if you are the type of person who doesn’t mind putting a little work in upfront and then passively managing your money, then this is the system for you.
I honestly am somewhere in between. Some of these categories combine into one essential sinking fund, and others separate into individual categories.
My Personal Sinking Fund Categories
After doing some research into this article, there is a good chance I may have to rethink some of my Sinking Fund categories. I feel like I am missing some things on my list.
- Bella – she is our dog and deserves her sinking fund
- Camp – we have a family camp where we must pay taxes, fees, and maintenance.
- Car – anything automotive, from car to camper, boat, snowmobile, etc., goes into this category.
- Gifts that aren’t holiday or Christmas-related. But anything else falls into this sinking fund category.
- Holidays – any other holiday from birthdays to Easter!
- House- all household related to the house, from new sheets to a new water heater.
- Propane – we prebuy our propane, and it’s one large payment.
- Summer – I like to have a separate sinking fund category for Summers, including everything from new patio cushions to flowers to camping and vacations.
Final Thoughts On How To Use Sinking Funds For Beginners
Those are my tips for sinking funds and personal finance. These mini savings accounts with money set aside will lead to bigger savings goals and less reliance on credit cards. In the long run, they will benefit you in your debt-free journey.
Sinking funds totally transformed our budget! We don’t have a lot – one for car stuff, one for cat stuff and one for gifts – but they have seriously made a world of difference in the way we go about planning our finances. We keep these funds out the bank, hidden away (unless they get too big, then we put them in an account). We have found this to be way more effective in terms of…not spending the money for other things haha.
I think one sinking fund I might like to start some day is one for our insurance (car and tenant). Right now, we pay it monthly and it’s fine, but I would not mind being in a position where we could pay our premiums outright at the start of the year.
Love this post, girl!
Hi Tara! Every little bit helps. I give all credit to sinking funs. They are the reason I stay financially sane!
Because money is 100% fungible ($1 for a car expense is exactly equal to $1 for a vet bill) I have one sinking fund that covers everything. I call it my “fire extinguisher”. I target an imprest balance of 10% of my net income. When a financial fire pops-up I just point the fire extinguisher at it. When the balance falls below the target balance all other savings goals are paused until I can refill the fire extinguisher. Easy peasy…just the way I like it.
This is a smart idea, Mike. That way, things don’t become too overwhelming. I like it – thanks for the idea!
If you just lump everything together without a plan for how much to spend on what expenses, doesn’t it become an emergency fund?
That’s an excellent question. Sinking funds are for the things you know are coming. Christmas, cell phone replacement, hair cuts. Emergency funds are for the unexpected. Furnace dies, hot water heater, car transmission, dog eats a sock and needs surgery, etc.
How do you set up sinking funds savings account. Want the fees eat up the account if you don’t maintain their monthly balance .
Many credit unions and online banking accounts have minimal fees. You may have to check around for a better bank.