Hi, Friends! Let’s learn everything you need to know about sinking funds!
- Does Christmas shopping feel overwhelming to your December budget?
- Do you have a vacation you need to save for?
- Do you need tires for your car?
If you answered yes, then you need a sinking fund!
I am going to cover everything there is to know about sinking funds including what they are and how to use them!
Don’t forget to grab your free sinking funds tracker to keep you organized!
What Are Sinking Funds?
A sinking fund is simply a strategic way to save money each month towards a predetermined future expense. A sinking fund offers encouragement to spend on larger financial expenses without scrambling to find the money.
Most importantly, sinking funds help us avoid adding to our debt for a large purchase.
Types of sinking funds
You can start a sinking fund for pretty much anything! For the following types of sinking funds, you’ll have an estimate for the amount you need and will save monthly until you reach that amount. Here are some types of sinking funds for set amounts:
- Car Insurance
- House Down Payment
- Recurring Memberships (ex: Amazon Prime)
- Insurance (ex: Car, Homeowners, Renters)
- New Car
You don’t always need a set amount to start a sinking fund! Here are some types of sinking funds you can start, even if you’re unsure of the amount!
- Medical Expenses
- Car Repairs
- Home Renovations
Sinking Fund vs. Emergency Fund
Having both a sinking fund and an emergency fund are super important. Sinking funds are for planning upcoming expenses so you don’t have to use your emergency fund, or better yet, put it on a credit card.
An emergency fund is for emergencies. This is when you have no idea what you need financially, but also can’t fit it into your budget to pay cash. You can find my post here on the importance of having an emergency fund.
How Do You Set the Amount?
You can set amounts for your sinking funds in one or two ways, fixed or variable amounts.
1. Fixed Amount
If you know you spend around $1500 for Christmas gifts, than you will most likely spend around that amount next year! You’ll need to decide when you want to start saving. Some people start in January and others will start in July, it’s completely up to preference!
Let’s say we decide to start saving in January (because who doesn’t like to be prepared!?!)
If you divide $1,500/12 months, you need to save $125/mo for the entire year to have the full amount.
If you divide $1,500/6 months, you need to save $250/mo for six months out of the year.
If you divide $1,500/3 months, you need to save $500/mo for three months out of the year.
See why it’s nice to start in January? 🙂 Based on what works best for your budget, you can choose whichever timeline! There is no right answer, but if you have multiple sinking funds going on at once, the longer timeline may work better for you.
If you need help figuring out your sinking funds and savings goals, I cover this in my 1:1 money coaching program. Check it out here!
2. Variable Amount
There are many sinking funds you can start, but you may not know how much you’ll need. To avoid dipping into your emergency fund, you can start sinking funds for expenses you know you need.
Let’s say you have a fully funded emergency fund and still have room in your budget for saving money! YAY! Let’s put that extra money to use!
For this example, we’ll assume the amount you have extra to put towards your sinking funds is $500. You can divide that amount like this:
- $150 for travel
- $200 for car/house repairs
- $100 for pets
- $50 for clothes
At the end of the year, if you didn’t need to dip into these sinking funds, you would have:
- $1,800 for travel
- $2,400 for car/house repairs
- $1,200 for pets
- $600 for clothes
These funds would allow you to go on a trip, fix the water heater, pay for an unexpected vet expense, and go on a shopping spree without affecting your emergency fund or your monthly budget! You’ll feel so much more at ease and reduce anxiety around unexpected expenses because believe me, they happen!
Where Do You Keep Sinking Funds?
I personally love and use PNC’s Virtual Wallet features! Although you don’t have different brackets for each individual sinking fund, the Virtual Wallet gives you such easy access to your funds immediately! They offer two types of savings features; Reserve and Growth. Reserve is meant for short term savings and Growth is for long term savings.
If you have a long term savings goal like a year to save for Christmas, putting your money in the Growth account will be best! If you start a sinking fund for pets, you may want to put that in your Reserve account for those trips to the vet! It’s completely up to personal preference!
Why I Love Using Sinking Funds
Not only are you saving money for expenses that will arise in the future, your budget won’t be straining to cover it! Imagine driving to work and getting a flat tire. You’ll need to cover the costs of a tow and a new tire! But, if you have a sinking fund for car repairs on hand, you won’t be stressed wondering how to afford it. And best of all, you don’t need to pull out that credit card!
Create a plan for what sinking funds you need, include them in your budget and you will start seeing results!