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Maybe you have heard about sinking funds before, or perhaps you got here because you have no ideas WHAT on earth they are! Either way, we are going to break down all the details you need to know about Sinking Funds, from what they are, why they are essential to your financial success, how to organize them, and more! Read on to get started!
What are Sinking Funds?
Sinking Fund is a fancy phrase for intentional savings. We set up sinking funds for the bigger things that we need to budget for in advance – sinking money into an account, allowing it to build up for when we need it down the road.
If you know you are going to need to replace your car in the next few years, you start saving in a sinking fund. Or if you have an annual property tax bill, you can save money each month so you are 100% ready when the bill comes due.
Remember, the key to intentional finance is deciding what you are going to spend your money on and making a plan ahead of time. Generally, that equates to sinking funds!
Why do I need them?
Throughout the year, there are medium and larger expenses that we can see coming. Not “Someone crashed their car through my garage door!!” – that’s an Emergency Fund expense, for sure!
We’re talking your annual property tax bill or car insurance. Christmas. Vacations. Car replacement.
The things that we can clearly see coming, and therefore can plan for them!
Without saving ahead for Christmas, December rolls around and your already-tight budget gets pushed to its breaking point, and then you turn to Visa to just ‘get you by’ until January. But then you don’t get the bill paid off and that slippery slope can be very long.
I’ve been there. One hundred percent, I have landed at the bottom of that icy hill, flat on my ass, with sixty-five thousand dollars of debt looming above me.
And let me tell you what, friends. I will NEVER go back to that place. I use sinking funds to make sure of it.
Protect that Emergency Fund
I think of sinking funds as the protective cushion around my emergency fund.
If your property tax is due and you haven’t saved for it, you could totally pull the cash from your emergency fund. But is that actually an EMERGENCY? And what happens when that car crashes through your garage, and you have an $8000 home repair bill, but you drained your emergency fund last month to pay the taxes?
Your emergency fund is sacred money. To be used IN CASE OF EMERGENCY. I never, ever want to have to use that money. By planning ahead and saving for things that I know I’ll need to spend money on, I haven’t had to dip into mine ever. (Yet – it’s coming, eventually. But I’ll be ready!)
You KNOW the property tax is coming. So plan ahead!
Sinking funds also allow you to plan ahead and pay cash for the things you want, guilt free. It takes the “shouldn’t” out of your spending. You don’t have to feel bad for spending $400 on new patio furniture, because you set purchasing a new patio set as a goal and intentionally saved for it. That is intentional finance. It’s how you build a healthy relationship with money.
Where do I put the money?
I keep my sinking fund money in the same account that my mortgage comes out of. It is separate from my daily account, and different again from my Emergency Fund money. I have quick access to transfer money in and out as I need it, but I keep it separate from my daily account so I don’t get confused and accidentally spend it.
Like your emergency fund, don’t lock it in an account where you’ll pay a penalty for withdrawing it! Make sure you have easy access and no fees.
What should I be saving for?
The things that you choose to save for are as specific and personal as your budget. I already pay my home and car insurance on a monthly plan. Same with my property tax. But Christmas? That’s on me to save for in time. It’s not like I don’t know it’s coming – the date never changes!
Here are some ideas for things you might want to start a sinking fund for:
Holidays (Christmas, Eid, Diwali, Hanukkah – whatever you celebrate!)
Gifts & Birthday Celebrations
How do I know how much to save?
Just like WHAT you choose to save for is specific to your budget, so is the amount you need to save. But I’ll show you three different situations to help you figure it out.
A pre-set amount
Let’s go back to the property tax example. You get a statement that tells you how much you owe for the year. Divide that number by twelve and voila, you’ve got the amount you need to save each month into your sinking fund! This is the most straightforward situation to deal with because the end amount is pre-set for you and you know how long you have to save for it.
If you are already part way through the year, simply divide the total by the number of months left until it’s due. Then, once you’ve paid it, you can adjust your budget to reflect splitting it over twelve months.
A growing fund
We aren’t always lucky enough to know the total amount we might need for certain expenses. So we set an amount in our budget each month and let the fund build up until we need it.
For example, I use a sinking fund for my pets. I budget $150 per month to cover their food, vet bills, and any other expenses that pop up along the way. I don’t spend $150 a month. Some months I might get close, but some months I might spend only $20. In this situation, anything that is left over at the end of the month goes into the fund. In a month where I buy food, or they visit the vet, I might have $2 to put into savings. But on those months where I only spend $20, that leaves $130 to go into the sinking fund.
I have over a thousand dollars saved up from doing this, and I’m going to continue to just let that number grow. I HOPE not to face a five thousand dollar vet bill EVER, but the more I have tucked away, the better my chances of walking away with my emergency fund in tact!
A goal fund
The goal fund is when you know the time frame, and you get to decide the amount. We are going to go to Disneyland next spring. I know now how much money I need to save between now and then, and I can take that amount and divide it by how many months until the trip. By saving NOW, I’ll have money set away already when three months out I need to book my flights or the hotel.
By saving NOW, I won’t be tempted to use my credit card to fund the trip and pay it off later. By saving NOW, I can focus on the fantastic family memories we are going to make, and all of that yummy Disney popcorn I’m going to eat!
This idea of setting a goal and working towards it works for anything you want to save for. Buying a new barbeque (also on our list of savings) – put away $50 or $100 or $10 a month until you have enough to buy it. Whatever it is you are saving for, just plan ahead!
Where does the money for sinking funds come from?
In order to build up these different funds, you use your magical, all-powerful budget! Add a budget line for the different items or events you are saving for.
For example, I have a Car Repair line under my Automotive budget category. So, each month, I build right into my plan $100 for car repair. When we had to fix the brakes (and then the calipers) on the car last month, we used that money. In March, we didn’t have any expenses related to our vehicles beyond gas and insurance, and those both have their own lines in the budget. So that $100 rolled into the sinking fund. I have a total of $500 built up in that account.
In a perfect world, I’d bump up my plan to $200 or more, so that the account builds up faster. But, because our financial priority today is hammering through our fully-funded emergency fund (3-6 months of expenses), I have it trimmed down. Any extra dollars go to the emergency fund, but when that is done, we will revisit our goals and see where we want to focus our savings.
Sinking Fund money isn’t magical, extra money. It’s money that you have ear-marked in your budget, to cover your upcoming bills and expenses.
How do you keep track of it?
Hopefully, whatever budgeting software you use allows you to make a budget line a fund. In EveryDollar, we click on the line and select “Make this a Fund” on the right-hand side. There’s a little pig icon next to it. You know, like a piggy bank where you are saving all your money? Once you turn on a fund you can adjust the starting balance (you know, if you have been doing this for awhile but just not tracking it in your budget).
EveryDollar tracks the balance of your fund from month to month. You can see in this picture that the balance of my Pet Care fund is $1067.26. When I add up all of the balances of my funds, it totals to the amount in my savings account.
Sinking Fund Tracker
I also like to keep a visual tracker of my sinking funds for quick reference. This allows me to keep track of the balance and stay motivated in saving for my goals!
The tracker is really flexible – you set your goal and the amount you are saving for. You can either divide the goal amount by 10 to spread it out over all ten boxes or you can record how much you are going to save per month in each box, and only use as many boxes as you need. I have both ways shown here in my tracker.
I don’t have a set monthly amount for a new barbeque – so every time I reach another hundred, I colour one in.
Wicked, on the other hand, I know that I will be buying those tickets in exactly ten months, and I’m able to put $40 a month aside for that, starting now.
However you choose to track, make it work for you!
You can grab our free sinking fund tracker here!
When do I move the money?
In EveryDollar, from the first month moving forward, the balance of the fund will update at the end of each month. If you make a purchase from the fund, like buying pet food, log it as usual. EveryDollar (or your budget program of choice) will subtract that total from the balance. At the end of the month, transfer whatever money you have left from your planned amount to your separate fund account.
For pre-set amounts, like you are saving $130 per month for your annual insurance premiums, transfer it over to the savings account like you are paying a bill. When the month rolls around that you pay the insurance, track that payment – by then, you should have enough money in the fund to cover it!
While I might have a few thousand dollars tucked away, they are there for a purpose. I might want to grab that money and spend a week on a tropical beach, but that money has a job to do, and it’s not to fund pool-side margaritas! (Don’t worry, I have a fund for that, too!)
Saving money in sinking funds is key to being intentional with your money and achieving your financial goals. Drop a comment below – what are you saving for in your sinking funds?