When it comes to managing your money and planning for future expenses, sinking funds are where it’s at!
A sinking fund is essentially a mini savings account that is intended to be spent for a specific purpose.
The majority of our bills are paid every 6 months. That meant that every 6 months, we’d be scrambling to pull together a much larger chunk of money from our budget or even from our savings account to pay those unexpected bills that we knew were coming! It was kind of like how we were somehow surprised by Christmas every year.
But then I learned about sinking funds and everything changed! I’m a planner by nature, and sinking funds are the ultimate plan ahead tool.
Sinking funds can really be used for anything that you need to save for and don’t want to budget into your monthly expenses in any one month.
Our sinking fund categories are:
- Car/renter’s insurance
- Home insurance
- Property taxes
- Life insurance
- Health insurance deductible
Each year, I add up all of these bills and then divide that amount by 12. That’s the amount that I put into our sinking fund category each month. To understand how I manage our sinking funds and savings account you can check out the post Sinking Funds and Savings Account Management.
Just like nearly everything else in the personal finance world, these are 100% adjustable based on your own personal needs.
Here are some other ideas for sinking fund categories:
If you take vacations, this category is a must! Rather than shoving all of the money on a credit card to pay off later, you can just flip it! Pay yourself a little each month and tuck it into a little category called VACATION or THE SMITHS TAKE CANCUN or ON OUR WAY TO VACAY-whatever!
I’m going to tell you a secret. You might need to sit down for this…
Your car is going to break down. Something in your home is going to break.
Since you don’t know when things like this are going to happen, it’s nice to have a little money tucked aside. That way they aren’t as financially stressful when they do happen.
If you have kids in high school, graduation is inevitable (hopefully!). This means senior pictures (probably at the beginning of the year), class ring, graduation cap and gown, graduation party (food, drinks, venue, invitations, decorations, etc), graduation presents/money for family friends. I’m sure the list goes on.
Price out senior pictures early and start saving a little each month. Same with all of the other expenses. You can have a sinking fund for each or just one big graduation sinking fund.
Birthdays come around every year. You can either budget birthday expenses into your monthly budget when there’s a birthday, or you can send a little to a sinking fund each month and pull from that when you need to.
This is one I should really do. I’m not a big shopper, so I really only buy something when I’m just about desperate. But if you’re a shopper, rather than trying to stop cold turkey or fit big shopping sprees into a monthly budget, putting a little aside each month gives you permission to spend from that sinking fund.
If you like to buy things for your home, rather than impulse buying and busting the budget, set up a sinking fund and pull from it when the urge arises!
If you’re saving for a house, setting up a sinking fund for your down payment is a great way to prepare for one of the biggest expenses of your life.
I’m sure there are a gazillion more I could think of, but that should do it for now!
In addition to our sinking funds, we also have a savings account. That’s for money that we save that doesn’t have an intended purpose. It just piles up to be used for a future truly unexpected expense or as a backup emergency fund.
What sinking fund categories would you set up?