The answer to What Is A Sinking Fund and your other most asked questions about sinking funds ANSWERED!
My husband and I really like to travel. We don’t do it a lot, but it is a conversation we are always having. The secret to being able to travel while on a tight budget? Sinking funds! They are my very favorite part of our budget! Today I’m explaining exactly what are sinking fund.
Do you use sinking funds in your budget?? If you don’t use them yet, I strongly suggest beginning immediately! They have enabled me to save up for the things we want, and the things we need; and they allow me to enjoy spending GUILT FREE.
What is a Sinking Fund?
A sinking fund is a smart way of saving money for planned future expenses. You contribute a small percentage of your income into the sinking fund each month. This gives you the ability to pay for the large expenses without having any stress; the money is ALREADY there!
For example, we use a sinking fund to save for our Christmas expenses each year. We know that December will be an expensive month, so we save a little bit of money each month into our Christmas Sinking Fund, and when the time arrives, we can easily pay for everything.
What types of Sinking Funds should I have?
Sinking Funds will be different and unique to each person and situation. Any known expense that you feel you should save up for, is a Sinking Fund. A few examples of sinking funds are:
- Home Repair
- Car Maintenance
Is this my Emergency Fund?
No, no and no! Your Emergency Fund is for emergencies ONLY! An emergency is usually an UNPLANNED expense.
A sinking fund is for all of those other expenses that arise, the ones that you know are coming and know will be expensive.
I KNOW that Christmas will come EVERY year, so I save for it through my sinking fund. I KNOW that we want to take our kids on a vacation in a couple of years, so I have a sinking fund to save for that large expense.
- Related: What is an Emergency Fund
How much should I save?
The amount to save into your sinking funds will depend on your income and what you are saving for. The best way to determine this number is to write down your goal amount, divide it by the number of months until you will need that money, and then you have the exact amount to save each month.
If we wanted to spend $1000 on Christmas and we started saving in January we would compute the equation: $1000 divided by 11 = (about) $91. So, now we know that we need to save $91 every month to have our Christmas fully funded by December.
Do I need to save a large sum each month, or make smaller contributions?
I encourage you to put money into your Sinking Fund with every budget that you make. Budgets are made at different intervals, usually depending on preference and pay period. I make my budget monthly, so I deposit into my sinking fund once each month. If you budget weekly, deposit money into your funds weekly.
Where do I keep my Sinking Funds?
You will want your money saved in a place that will be readily available. Do not put these funds into the stock market. A regular savings account or money market account is best. I know of a few people who prefer setting up multiple savings accounts for each individual Sinking Fund. Check with your bank about opening up multiple accounts, my bank charges for each account, so it just wouldn’t be worth it to me.
We decided to keep the funds all together in one savings account. This is where an excellent budgeting program comes to play. I use YNAB for budgeting and it allows you to set up certain categories as Sinking Funds. This makes it possible (and so easy) to be able to track how much each fund holds at all times.
If paper and pen is your thing, go with it! You can easily track your sinking funds using my Free Sinking Fund Tracker. Download it, along with 4 other free printables below.
How is a Sinking Fund different than a Savings Account?
It’s not really. I use my bank savings account as a place to store my emergency fund and all of my sinking funds. The biggest reason to use a sinking fund is to encourage you to save with intention and purpose.
Johnny saves $100 every month into his bank savings account. He is proud of his regular savings and dreams of one day having enough for vacations, a new car, or any emergencies that may arise.
After one year Johnny has $1,200 saved. He had some needed to make repairs in his basement bathroom and used the entire savings account to cover the costs for those repairs.
April saves $100 every month into her bank savings account. She uses YNAB (or any other budgeting program) to save this money into separate sinking funds. Monthly she puts $50 into her emergency fund, $25 into her new car fund, and $25 into her vacation fund.
After one year April has $1,200 in her emergency fund, $600 in her home maintenance fund, $300 in her new car fund, and $300 in her vacation fund.
April now has possibilities. She can use her home maintenance fund to begin repairs on her basement bathroom, or wait a few more months to help that grow a little more.
When you save money using sinking funds you are are giving yourself options and control over your savings. You are making it possible to save for large expenses, without having to juggle all of the other costs that can get in the way. Think of sinking funds as a budget for your savings account.
If you aren’t using sinking funds in your budget, I highly suggest you start now. It opens up a whole new world of saving possibilities! Make sure to grab my free budget printables below to help you get started.
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