Sinking Funds | What is a Sinking Fund and Why Do I Need Them
Do you know what a sinking fund is? If so, do you have a sinking fund? If not, you definitely should! Here’s everything you need to get started.
Sinking funds and Emergency funds work similarly but are used for very different purposes. If you have been using your Emergency Fund for unexpected expenses, that are not true emergencies– you may be shortchanging yourself! (Badumpsh! See what I did there?! Pun intended!!)
What are Sinking Funds?
Sinking funds are a pot of money (or several pots of money), that you regularly contribute to, for expenses that aren’t regularly occurring or that you know are coming and need to be set aside.
The main difference between Emergency Funds and Sinking Funds:
Emergency Fund: for expenses you don’t know are coming and have to be addressed immediately. Like losing your job– that calls for dipping into your emergency fund.
Sinking Fund: for expenses you know are coming, but don’t always know when they are coming OR they are not regularly occurring. There are tons of examples of below, but paying for ballet lessons or new tires on your car. Both are great examples of when you would use sinking funds.
While having a regular budget is an absolute necessity when telling your money where to go, they really only cover expenses that occur regularly.
So what happens to annual dues, HOA fees, vacations, tires for your car?
Those are what sinking funds are for and yes, you absolutely should start setting them up ASAP!
How Can Sinking Funds Keep You Out of Debt?
For most people, when something unexpected pops up they are quick to whip out their credit card.
If you are whipping out your credit card to pay for your daughter’s field trip, chances are it’s gonna take you a minute to pay that back. Which means you will be paying interest on that $100.
Don’t do that to yourself. Plan ahead. Get ahead of what has the potential to turn into a stressful situation.
Yes, credit cards could band-aid the problem, but it’s gonna cost you.
How Do I Set Up Sinking Funds?
First, I’d recommend you sit down and make a list of what you have upcoming that you need to set aside money for as well as things you think have the potential to come up.
Second, where are you going to save the money? Under your mattress? In a jar? In a traditional savings account? A high yield savings account?
There are tons of other online banking options though.
One of my favorite features is that you can automate your savings. You can literally set it and forget it.
Another perk is that it’s accessible without being too accessible, making it harder for you to dip in for money when you shouldn’t, but not when you need it.
How Can I Track My Sinking Funds?
You have two real options when it comes to tracking your sinking funds.
Option A: One lump account. I have one lump account that I contribute to and then track what funds I’m depositing into and the amount in my budgeting spreadsheet.
Option B: Individual accounts. You can set up individual accounts (a la Capital One 360) with their own names and their own accounts.
Sinking Fund Checklist
In case you need some help coming up with potential sinking funds, here’s a list of different types of sinking funds you might make:
You know best what you have going on in your life. You can set up Sinking Funds for just about anything.
Think back over the last year and where things cropped up and forced you to overspend in your Budget.
- Back-to-School shopping (because let’s be honest, it’s getting crazy expensive to cash flow a few hundred dollars in school supplies– Lawd!)
- Coloring your hair– because you just can’t with your grey roots.
- New Winter Coat and Boots
- You want to run your first 5K and need to cover registration.
Whatever it is, no matter how strange or random–write it down and start planning for it today.
Sinking Funds serve a strong purpose as a part of your overall budget. They can help keep you from racking up additional debt. They can ease the burden of the irregular and unexpected expenses, but you have to do your part by being prepared and regularly contributing to them, even if it’s just a few dollars here and there.
If you are looking for ways to find extra money to start building your sinking funds fast, I’ve got a fantastic round-up of some great, easy side hustle ideas, which I talked about in my post about how to build an Emergency Fund.
I hope you’ve found some part of this helpful. Please comment below with your own sinking fund ideas, I’d love to hear them!