You’ve probably heard the term ‘Sinking Funds’ but are wondering just WHAT IS a sinking fund?
And (most importantly) how do you use sinking funds to improve your budget and even save money?
Lucky for you, that’s exactly what I’ll be going over in this post and complete guide to teach you all about what is a sinking fund and how you can use it to 10X your savings!
What you can expect from this guide:
+ What is a sinking fund
+ How to start using sinking funds immediately
+ What type of sinking funds you should have in your budget
+ How much to save for each sinking fund
+ Where you should keep your sinking funds
+ FREE printable sinking funds tracker!
Sometimes in life these unplanned, little emergencies come up.
Like those times when your water heater goes out on the weekend in the middle of winter?
Or, you hit a giant pothole that destroys your rim and flattens your tire? (yes, this exact thing happened to us …. hello new rims, goodbye $800 dollars ..)
Maybe you’ve just found out that you owe more in taxes (honestly, this is the worst!)
The point is, there’s crappy things that happen ALL THE DANG TIME that all costs money and we can’t avoid. (Sure, my husband could have slowed down and not hit the pothole …. but that’s another discussion).
And maybe you have an emergency fund that you could always use for those random things. But, when I forget to budget in a baby shower gift for my coworker I feel weird using my emergency fund for that.
If you’re always using your emergency fund for the little things, what happens when there’s a BIG thing that you really need it for?
Like losing a job or major medical bills.
You wasted it away on getting Christmas gifts for your entire office.
So, how do you stop using your emergency fund for all these “non-emergencies”? You use a sinking fund!
WHAT IS A SINKING FUND?
I know you’ve been asking, what IS a sinking fund and how is it actually going to help my budget?
A sinking fund is a handy-dandy little tool to prepare you for the things that aren’t quite an emergency, but still cost a pretty penny.
And by tool, I mean savings.
A sinking fund is a separate savings for specified events or things coming up in the future that you add money to each month.
Basically, for me, it’s so that my husband doesn’t ask questions when I spend $150 on my hair.
SINKING FUND:
A separate savings for a specified event, or purchase coming up, in the future that you contribute money to each month.
For example, I get my hair done every 4-5 months. We all know how pricey that can get. What I do is I set a small amount of money aside each month (about $30) that goes into a fund labeled HAIR FUND.
That way when I go get my hair done I’m not taking out a big chunk of my budget that month. I take what I’ve saved and BAM – happier husband and happier me because who doesn’t love fresh hair?!
You can create a sinking fund for so many different things (and you totally should). You can save as little as $5 dollars in your sinking funds every month, or as large as $100 dollars every month.
The really cool thing is you get to choose and adjust for your budget.
HOW TO START USING SINKING FUNDS IMMEDIATELY
It may seem a little overwhelming at first to start with a bunch of different sinking funds. To make things easy, follow these simple steps to start using sinking funds immediately AND successfully!
1 – PICK 3 SINKING FUNDS TO START WITH
To begin with you only want to start with 3 sinking funds and see how your budget does.
The 3 sinking funds I recommend starting with are:
+ $1,000 emergency fund (if you don’t already have it)
+ House repair fund
+ Christmas savings fund
These are 3 of the most common sinking funds and ones that everyone will have to use. They’re the best to start out with because they’re the most necessary and are typically the things that cause your budget to fall apart.
2 – SET A GOAL AMOUNT FOR EACH OF THE 3 SINKING FUNDS
For each of the sinking funds specify a specific amount you want saved up for each.
For the emergency fund you want to start out with $1,000 until all debt is paid off (following Dave Ramsey’s baby steps).
The house repair fund and Christmas savings fund can be specific amounts that you feel comfortable with. For now, start out with $250 as a goal for each and raise it from there.
(Sometimes starting with a smaller goal and hitting the smaller goal first will give you the motivation to continue with a larger goal – once you hit $250 raise your goal to $500 … etc.)
3 – GET THE CASH ENVELOPES AND DOWNLOAD SAVINGS TRACKER TO TRACK YOUR SINKING FUND PROGRESS
Now that you’ve determined your 3 sinking funds you’re going to start with and set a savings goal for each it’s time to get your cash envelopes so you can start saving!
(You can also have multiple savings accounts for each sinking fund, however I find that it’s easier to use cash envelopes to keep it all organized and handy.)
I get my cash envelopes here from Amazon and they have lasted me a few years already and have a lot more to go!
You’ll also want to download the free sinking funds tracker so you can keep track of your progress and know exactly how much you have saved in each sinking fund.
FAQ’s about sinking funds:
HOW WILL A SINKING FUND IMPROVE MY BUDGET?
I think we’ve established the need and what is a sinking fund, but you may still still be wondering, “Is this really for me?” …
YES! A sinking fund is for anyone who is ready to stop going over budget and finally feel PREPARED for the months ahead.
A sinking fund allows you to save for something in small increments so that you’re not breaking your budget every time you have to make a big purchase (ie. – CHRISTMAS).
Everyone should use sinking funds. It’s so much easier to take $20 dollars out of your budget each month than it is to take $200 dollars out of your budget.
You should use sinking funds so that you’re not sneaking from your emergency fund just because you really want new shoes.
–> If you haven’t started a budget yet, check out the complete guide here to start a Beginner’s Budget.
WHAT TYPE OF SINKING FUNDS SHOULD YOU HAVE?
This is the totally awesome part – you get to choose what type of sinking funds you want to include in your budget!
Everyone is going to have different priorities when it comes to their budget and sinking funds, mine may look different than yours and that’s totally okay.
COMMON SINKING FUNDS TO INCLUDE ARE:
+ Christmas
+ Birthdays
+ Car repair
+ House repair
+ Baby/Wedding shower gifts
+ Hair
+ Vacations
What I constitute as needing a sinking fund is anything over $150 dollars that is not a REAL emergency.
A real emergency = losing your job or going to the emergency room.
You get to decide what you want to save for, your options are honestly endless.
HOW MUCH SHOULD YOU SAVE IN YOUR SINKING FUNDS?
Now the real question is – how much should you be saving in each sinking fund category?
If the sinking fund you have has a specified amount (like a specific vacation) you’d research the cost of the trip and set a savings goal for whatever the price of that vacation is.
If the sinking fund is something general like car repair, start with a goal of $500.
Once you hit $500, evaluate the situation. If you haven’t used it at all, your car is in pretty good condition and you don’t need new tires any time soon, you could probably hold off on putting more in it for the time being.
If you noticed that you may have to get tires within the next year, keep adding to it making your goal $1,000 (or, whatever the cost of the tires would be).
Same with a house repair fund – there are always things that come up or even stuff/furniture you’d like to add. Evaluate how much you’re using in that fund so you know how much to save.
For funds such as a car and house repair, I would evaluate every 3 months to see if you need to raise or lower your goal amount.
If you have a sinking fund for hair, for example, I like to keep $200 in it. Once I hit $200, I stop putting money in it. If I only use $50 dollars out of it, I replenish the $50 until I hit the $200 again.
WHERE SHOULD YOU KEEP YOUR SINKING FUNDS?
You have 2 options on where you should keep your sinking funds at:
+ Cash envelopes
+ Savings account
I personally keep mine in a cash envelope since we already use cash envelopes to budget. However, if you’re not using cash envelopes regularly it may be easier to open up a separate savings account for specific sinking funds.
PRO TIP: You’re not penalized for opening multiple savings account – however be cautious as some of them require a certain amount in them at all times.
I’ve found the easiest way is keeping cash envelopes. It keeps my sinking funds organized and close when I need to use them instead of trying to transfer money from savings to checking accounts.
These are my favorite envelopes from Amazon that I use to keep all my sinking funds together.
WHEN SHOULD I USE MY SINKING FUNDS?
When you need it! Your sinking fund is to be used at your convenience, that’s the awesome thing about having it. When you need it, you use it.
On most of my sinking funds I don’t have a goal date. However, if there’s something like a fun vacation we have planned I will set a date to save X amount of dollars by X date.
For Example:
California Sinking Fund – $2,500 dollars by August 30th 2020.
Even though I don’t always have a goal date, I ALWAYS set a goal amount for each of my sinking funds.
For instance, my hair sinking fund I like to have a goal of $200. Once I hit $200 I use the money I was previously putting into it each month (usually $50 dollars) to fund another sinking fund or put in a big savings that we have such as retirement, house savings .. etc.
Once I use a portion of the $200 dollars (okay let’s be real, ALL of the $200) I start refilling my sinking fund until I hit that $200 again.
It’s a continuous cycle that DOESN’T break the budget.
SHOULD I USE SINKING FUNDS IF I’M STILL PAYING OFF DEBT?
It is absolutely okay to use sinking funds while you are still paying off debt!
However, you’ll want to be a little more picky about the kind of sinking funds that you have.
Instead of having a hair, vacation or clothing sinking fund you’ll have ones like:
+ Car maintenance
+ Home maintenance
+ Insurance (if you’re not paying it monthly)
+ Christmas
+ Birthdays
You’ll also want to pay more attention to the goal amounts you’re giving each sinking fund. If you’re still paying off quite a bit of debt you don’t want to add a ton to Christmas and birthdays until the debt is paid off.
Breaking the bank to try to afford a hefty Christmas and birthdays WILL make a difference in how fast you pay off debt.
By just putting $10 dollars into these sinking fund categories each month you’ll feel so much more relaxed and prepared when these non-emergencies come up.
CONCLUSION
Now that you’ve gotten the complete guide on what is a sinking fund and EXACTLY how it can help you budget and save money, you can start using them!
You’re well on your way to a happier, less-stressed life and budget with your sinking funds saving you one ‘mini budget emergency’ at a time.
Share below what 3 sinking funds you’ll be starting!
Angela Higgs says
I handle my sinking funds a bit differently. I have a weekly amount budgeted and put that into the envelope. That way when I need money it’s in there. Right now I have the following sinking funds: Personal property taxes, home repairs, car repairs, appliance repair/replace, gifts (Christmas, birthday, weddings, etc.), school supplies (includes printer ink), camping, Wedding expenses (our oldest is getting married), clothing. Some of the envelopes we will move money from it to the Emergency fund. I want to keep enough in the appliance repair fund to replace at least one of our appliances, anything over that, we move to the Emergency fund.
In 2017 we were moving to a new house and little did we know that the refrigerator was going to die less than 24 hours after closing. Luckily, our appliance repair/replace fund had enough to pay cash for a new ‘fridge.
I lump all gift giving occasions into one envelope. Some years all that gets spent is birthday and Christmas; and then there this year: between 5/1/19 and 5/30/20, there have been/will be 4 family weddings. Luckily we knew the weddings were coming and I was able to increase the budget a bit.
We all have fairly old cars, my car is 20 years old, my husband just replaced his 1999 car with a 2014 car, our son’s car is a 2004. We never know when we need to have repairs done. Plus we have oil changes every 3 months, then tires when they wear out, When our son’s car needed repairs it ended up being $1500, luckily we had it in the envelope. When my car was vandalized and a window broken, we used $350 from the car repair sinking fund to replace it. Supposedly, that will be refunded to us after the young man’s court date, but I’m a cynic and will believe it when I have the cash in hand.
For the past two summers, we have participated in a fun program where we visit specific sites in our state and get prizes to do so. It’s fun, but it’s a big state and we have to take a couple of 4 day weekends and need hotel money. We used to do a lot of camping and when I had a serious injury and now cannot get in and out of our camper, we switched that sinking fund to our “adventure” weekends.
Our home repair fund is taking quite a beating. The house we bought in 2017 had an unfinished basement. We planned on finishing one room a year. Then our daughter became engaged and we had to work faster since we had not started on the guest room and needed it for guests. We may have to move money from other funds to get this finished, then replace the other funds. I don’t like doing that, however, my daughter will only get married once.
When the children were little, it almost never failed as the clothing envelope was getting nice and fat and I was thinking of putting some into the emergency fund, one of the kids got up and we discovered the clothing that fit the day before no longer fit. I’d find something for the child to wear to school and then we’d go shopping after school.
Right now our appliance repair/replace envelope is getting full, and out very old washing machine is starting to act up. I’m hoping that it will last a bit longer so I can get a matching washer/dryer.
I’m looking forward to a time where I can add another sinking fund… spoiling the grandchildren. I’m sure my kids will hate that fund, but the future grandkids and I will love it.
McKenzy Potter says
Angela, this is great! Doing it on a weekly base can be super helpful instead of monthly. It sounds like you guys have really benefited from using sinking funds. The grandchildren fund will be such an amazing and special one for you! Thank you so much for sharing 🙂