The Basics of Sinking Funds (And Why You Need Them)

Have you ever gotten in your car and been immediately greeted by a message telling you it’s time for an oil change? How about you look at the calendar and realize your dog needs his annual checkup? These types of expenses slip our minds very easily and can derail a budget in no time. Let’s go over the basics of sinking funds and how they can save your budget!

A sinking fund is a savings account set aside for a specific expense that you know is coming and have a rough idea of how much it will cost. Usually, you set aside a certain amount of money each month towards that specific expense. You can have one sinking fund or you can have 20, it just depends on what kind of expenses you see yourself having.

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The Specifics

Sinking funds are separate from your emergency fund. (If you don’t have a starter emergency fund you need one!) I personally keep separate savings accounts for each one of my sinking fund categories; they’re in savings accounts that return a little higher interest rate than the average bank. My sinking funds are in Capital One 360 savings accounts, which are all connected to a checking account that I have a debit card for. This enables me to keep my sinking fund money separate from the rest of my money, but I still have easy access to it when I need it.

Many people also use the envelope method for sinking funds. You can have a separate envelope for each fund and pull cash from the bank to keep in the envelope. You don’t earn any interest this way, but you may be way less likely to spend it – especially if the envelope isn’t kept in your wallet!

Getting Set Up

So, how do you get started setting up your own sinking funds? Pull out a calendar and try to think of all the expenses that come up throughout the year. Also, consider regular expenses like oil changes and vet expenses for pets. I ended up with the following list of sinking funds:

Christmas – I use this for gifts and for travel
Vet Fund – with eight fur kids, this is a must!
Property Tax – due every year in December on vehicles in my state
Car Maintenance – covers expenses like oil changes, tire rotations, and new tires
Gifts – birthdays, graduations, baby showers, etc.
Miscellaneous – things I forget to budget for
Personal Emergency Fund – some emergency money separate from my joint account with my boyfriend.

How Much is Enough?

From here, decide how much you want to have in each fund. Certain funds need to have a certain amount by a certain deadline, but others are just continual expenses that are a little trickier to budget for. Start with the easier ones – like Christmas and property taxes. The money for this is needed at the same time every year. Decide on an amount you want in your Christmas fund and divide that number by the number of months until Christmas. So if it’s January and you want to have $600 for Christmas, divide that number by 12 to get the dollar amount you need to save each month to hit your goal – so $50.

I have done my sinking funds by paycheck in the past as well, where I set aside a certain amount each time I got paid. To do this, you would take your goal and divide it by the number of pay periods until you’ll need the money. In my previous example, let’s say you get paid twice a month. You would divide your $600 Christmas goal by 24 instead of by 12. This way you’d only need to save $25 each time you got paid toward your Christmas fund.

What About Variable Expenses?

Figuring out how much you should save for more sporadic expenses is not quite as simple and can depend on the fund itself. For example, I don’t have a lot of reasons to buy gifts for people other than birthdays. Because of this, I just put $10 into this fund every month. By the time I need to buy a gift I usually have $40-50 to work with, which is plenty for most situations.

Expenses like car maintenance are a little tougher for me. I drive a lot for my job, so I need oil changes every 3 months. An oil change for my vehicle is around $50. I save $20 in my car expenses fund every month, so by the time I need an oil change I have enough money saved to get my oil change without having to cash flow it from my budget. When I get closer to needing new tires, I will increase my monthly amount to start building savings for that. Think about what kinds of expenses you have and your history with paying for those expenses to help determine how much you need to set aside!

Build a sinking funds line into your budget when it’s time to add money. That way, there are no excuses to not put the money where it’s supposed to go.

Make Sinking Funds Work for You

Sinking funds are great because they can provide a lot of peace of mind, especially if you are working on paying off debt. Even though it’s tempting to throw everything you possibly can at paying down debt or saving for a goal, an emergency fund, and sinking funds are important safety nets that can keep you from blowing your budget – or getting further in debt! They’re a great way to put savings on autopilot and create a habit of setting money aside each month. It’s a relatively easy way to keep from stressing if you forget to budget for something or have an expense come up mid-month. A little planning and time spent setting up your sinking funds now will save you from having to worry later!

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