Has a large bill ever hit your mailbox that you knew was coming but you were totally unprepared for? Yeah, me too. Sinking funds will save you next time this bill comes due. A sinking fund is a line item in your budget that you sink a little bit of money into each month.
A perfect example is Christmas. It comes up every single year on December 25 but for some reason, it is a surprise to many. Christmas is one holiday that credit cards are over-utilized and by planning ahead of time and using a sinking fund the Christmas debt could have been avoided.
We will continue with our Christmas example. Let’s say your Christmas budget is $1200. This will cover Christmas dinner and all of the gifts you would like to purchase. In January you’ll start setting aside $100 per month into a savings account. You’ll add a line item for “Christmas” to your budget and each month you’ll add another $100. In December you’ll add the last $100 to the account. This will give you money to spend throughout the year if you find the perfect gift or $1100 in November to spend during Black Friday. It’s up to you.
Isn’t a sinking fund really just a savings account?
Yes and No. A sinking fund is specific for what the money will be used for you and you have a budget that you want to spend on that particular item. A savings account is just a general account where you save money. It doesn’t necessarily have a specific use.
Of course, you can keep your sinking funds in a savings account. That is perfectly fine. Just remember that money has a specific job to do for your budget.
Isn’t a sinking fund really part of your emergency fund?
No. Sinking funds are for known expenses that are coming due. You know you’ll have car repairs each year and will need oil changes. These are predictable expenses you should be setting money aside for. An emergency fund is for the unknown. You get laid off. You get into a car accident. These expenses are a surprise and the emergency fund is in place to cover them.
What sinking funds should I have?
Deciding on what sinking funds to set up for your family is a personal choice. Look at your overall budget and what larger expenses you have coming due this year.
Here are 10 Sinking Funds You May to Use:
Christmas is not a surprise yet we are often reactive in November and December and reach for our credit cards. Decide on your holiday budget and start setting aside money now. Maybe you want all of our funds to be available in November. Perfect. Figure out how many months you have to save and work that into your budget. You’ll be glad you did when Christmas is paid for in cash!
Car Repairs & Car Replacement
If you live in the United States you most likely own a car. You will want to set aside money for repairs. Something is going to come up. Whether it be as simple as an oil change or a bit more expensive with new tires and rotors. There is always something that needs to be done with our vehicles.
Also, cars don’t last forever. Rather than financing your next vehicle start setting aside money now. Of course, I am going to recommend the cash route for a car purchase. You’ll want to decide how long you have to replace to your car and what price point you are looking at purchasing. Research cars now so you have an idea of how much you may need. Don’t get sucked into the trap of the never-ending car payment. Spending upwards of $500 per month on a vehicle is just crazy especially since it is depreciating every day it’s in your driveway.
If you own a home you will want to set aside money each month. Home repairs are costly. Replacing a refrigerator can set you back over $1000 and a new air conditioner is anywhere from $3000 to $10000. You don’t want these repairs sneaking up on you. There are also smaller home repairs that you will want to set aside money for like replacing light fixtures. Home repairs will come up and you’ll want to be prepared when you do.
How Much Should You Budget for Home Maintenance? – The Balance
We all go on vacation. A lot of us bring our vacations home with us in the form of credit card debt (been there, done that!). Plan your vacations ahead of time and start setting money aside now. You will be able to pay for your airfare, hotel, food etc in cash by planning ahead of time. Even if you do not have a specific trip in mind for the year set aside a little bit anyway. You may find a great deal on a weekend getaway and if you have a sinking fund for vacations you’ll already have money to fund it.
It’s a sad reality but medical bills bankrupt a lot of families. In the United States the cost of medical care is on the rise and even with insurance we have co-pays and out of pocket maximums, we must meet. By setting aside money into sinking fund you’ll have peace of mind that you can pay for your medical care when the time comes. We can’t plan for when we are sick but we can be proactive in paying these bills.
Summer Camp and Activities
If you have school aged children you will most likely need to figure out childcare for the summer months. Setting up a sinking fund at the beginning of the school year will allow you pay for summer camp without hindering your budget during those months. Summer camp can be expensive so be sure to do your research ahead of time on different camps you may be interested in sending your kids to.
Anniversaries are a big deal to some couples. If an anniversary gift and fancy dinner are important you and your significant other start planning for it now. Anniversaries don’t have to be extravagant but even having a little bit set aside will be a nice treat.
Baby Showers & Weddings
Depending on your stage of life you’ll most likely have baby showers and weddings to attend. These can be costly. If you have a friend or family member that was recently engaged start setting aside a bit of money now. Even if you’re not in the wedding party you may have to pay for transportation, lodging, attire, gifts. It can be expensive. While baby showers are cheaper than a wedding if you have multiple showers in a year it can get expensive quickly.
We touched on Christmas but don’t forget about the other holidays that come up throughout the year. Valentine’s Day, Easter, 4th of July, Memorial Day, Labor Day, Thanksgiving etc. Most of these holidays warrant spending money and planning ahead of time will alleviate some of that stress for you. These holidays don’t have to be expensive but planning for them will make life that much easier.
If you or your significant other have an expensive hobby you may want to set up a sinking fund for it. You’ll have a bit of money set aside so when you want to spend money on your hobby it is there for you without breaking the bank.
There you have it. Sinking funds. That simple savings account that can save you many headaches.
While prioritizing your budget to pay off debt or reach other goals is important don’t forget about those other expenses that come up throughout the month. Sinking funds are just as important. You do not need to include every fund that I listed above. Take a look at your budget and how much you have spent in previous years on certain holidays or activities. It may warrant a sinking fund just to keep your budget on track with your goals.
If you have smaller bills that come up throughout the year like car registration you may just want to cash flow it. Not every annual bill will need a sinking fund. If you can fund it without it making a huge impact on your budget then don’t worry too much about setting up the sinking fund. I much prefer to keep to my budget simple while still covering our expenses.
Do you utilize sinking funds? Let me know in the comments!