I have been trying to budget successfully for several years now, but something always sabotages me. Unexpected expenses, items I forgot to budget, and lack of discipline on spending were the common culprits. Without fail, we continued to run out of money before we ran out of month. After some serious soul and budget searching I discovered what the missing component was to our budgeting mojo – sinking funds.
What are sinking funds?
A sinking fund is essentially a savings account where you allocate a small amount of money every month before you make a purchase. Or any budget category that doesn’t have a fixed amount. Dave Ramsey’s favorite example of a sinking fund is a Christmas fund. Christmas comes on the same day every year, so why are we so darned surprised by the expense of it? By putting a small amount aside every month you can easily eliminate the stress of holiday expenses. And that, is the perfect example of a sinking fund.
Which categories should have a sinking fund?
The sinking funds that should be in a budget will be unique for each person and family, but there are a few main categories that may give you inspiration.
This is one area all of us are likely to spend major money, but few of us prepare for! Whether you drive a brand-new car or an old beater, you WILL have repairs. And eventually you will need to replace that vehicle, so make sure you put money aside every month.
Our homeowners insurance is paid by escrow, but we pay our auto insurance bi-annually because it saves money vs. monthly. That can be a big chunk of change and the payment date sneaks up out of nowhere. By setting aside 1/6th of the money we need each month, the whole payment is there when we need it.
We already covered Christmas, but don’t forget birthdays, Mother’s Day, weddings, and all the other occasions and holidays when you give gifts. Having a sinking fund for gifts has enabled me to buy ahead of time and catch better sales, too!
Depending on the state you live in, car license and registrations can be expensive. This is something we save for monthly, as well as my professional license as a hairstylist.
We have a healthy sinking fund for our pets because we feed them high quality food, and we never want to be in the position where we can’t provide them the veterinary care they need because of money.
I can’t believe how many homeowners can’t afford any maintenance or repairs beyond their payment. If you own a home, you WILL have expenses come up like unexpected leaks, or appliances going out. And you will want to change the paint color or update carpet at some point, so save up for it!
In the same vein, we also have a sinking fund for warranties and insurance. We plan to renew the homeowner’s warranty that was included when we purchased our home because our house has an old furnace, water heater and odds are something big will need to be replaced within the first couple of years. We also purchased extra insurance on the water main and pipes coming into our house after my sister experienced a water main break and we saw the expense involved!
Subscriptions and Memberships
Do you have Amazon Prime? A Costco membership? Start a sinking fund so you aren’t surprised when these come due.
Do you ever want to go on vacation? Then start saving for it! You wont be shoveling a lot of money into this fund until you are out of debt, but its important to plan ahead.
This isn’t a comprehensive list of sinking funds, but it gives you an idea of the types of things you should be saving for. You can be a detailed as you want. I know someone who has a sinking fund for her Erin Condren planner every year!
How do I organize my Sinking Funds?
One area I struggled with was how to organize my sinking funds. I started out with cash in envelopes, but the income and outgo got confusing. And to be totally honest, it was too easy to swap money amongst the envelopes when one category came up short. I tried putting them in the bank, but it was too hard to organize how much money was in what fund when it was lumped into one account.
What Works For Me
The step that has been revolutionary in my budget is putting my sinking funds in Capitol One 360 savings accounts. Capitol One allows you to have up to 50 accounts with no minimum balances or fees. I started with a checking account and transferred all of my sinking fund money over (I also got a free debit card and checks). Once that money cleared I opened individual savings accounts for each sinking fund. No more trying to remember what money belongs to which fund!
How do I decide how much to put in each sinking fund?
For fixed expenses like insurance or memberships, take the total amount and divide it by how many months are between payments. Pay yearly? Divide that number by 12. Every 6 months? Divide it by 6. If the category DOESN’T have a fixed amount, try to estimate what you spend in a year on that category (or should be) and divide that number. You can adjust as you go, and if you have more or less income one month some of the less-vital categories can be tweaked.
No matter what sinking funds you set up or how you manage them, every budget needs them. Sinking funds are the most essential component of your budget that will keep you from going into further debt, and being a good steward of your money in action. Do you utilize sinking funds? I’d love to hear some of your categories in the comments!