Sinking funds are savings accounts where you save up a small amount at a time for a big expense.
They can be used for large one time purchases, annual or semi-annual bills, yearly expected expenses, or unexpected expenses. People save sinking funds in multiple ways, from cash envelopes to multiple savings accounts to one big savings account with detailed tracking.
Sinking funds can change your life. They radically transformed our budgeting life once we started using them. It truly makes sticking to a budget much easier because you eliminate the large expenses that wreck most people’s budgets.
Setting Up Our Yearly Sinking Funds
Setting up my sinking funds for the year will keep us on track with our budgeting and hitting financial goals in 2021. I’m using my sinking funds trackers to keep myself on track with my balances and how I’m saving to hit spending goals and paying annual bills.
Our Sinking Fund Categories
For 2021 our sinking fund categories include the following things:
- Car Insurance
- Life Insurance
- Car Repair
- House (+ New Fridge!)
- Pet Expenses
There may be more sinking funds that we add later on in the year or we may end up cash flowing things as they come along since we do have a major online income source that can help cash flow extra monthly expenses.
Our sinking funds are split into two types
- Date based, where we need to save up a certain amount of money to spend or pay a bill by a certain date
- Ongoing, where we need to save up money continually for eventual unexpected expenses where we don’t know the exact amount
Between all of those things we have our yearly sinking funds set up like this:
- Birthdays – $125 per paycheck or $250 per month
- Christmas – $25 per paycheck or $50 per month
- Car Insurance – $40 per paycheck or $80 per month
- Life Insurance – $20 per paycheck or $40 per month
- Car Repairs – $50 per month (will increase)
- House Repairs (Fridge!) – $200 per month (big chunks too)
- Pet Expenses – $50 per month
We broke down our goals from how much we needed by certain dates in order to determine how much we needed to save per paycheck and per month.
What are sinking funds?
Sinking funds are accounts with a purpose.
They are accounts you save into regularly for spending on expenses that are irregular expense, non-monthly expenses, unpredictable or big one time expenses.
It’s a mini savings account for an expense you know you’ll have in the future.
Sinking funds make saving for these hard to budget items strategic and stress free. You set a little bit aside each month until you hit your goal… and then you spend it!
So if you’re saving up for an event 6 months from now, you put a smaller amount aside into the sinking fund each month until the event where you spend it all. Sinking funds are designed to let you spend without stress or worry.
Common Sinking Fund Categories
Below are some of the most common and often most helpful sinking funds that you can add to your budget.
This list can help you with a starting point on what types of sinking funds you might want to try in your own budget.
- Car Repairs Sinking Fund – Car repairs will eventually happen. Every car needs repairs at some point even if it’s just general tire rotations or oil changes. Maintenance on cars is a necessary expenses if you own a car.
- Car Replacement Sinking Fund – Cars don’t last forever unfortunately. This means you’ll eventually need to replace your current car. Saving up a little bit every month into a car replacement fund will make the purchase of a new car much less painful and will prevent you from going into debt to get a new car when the time comes.
- Home Repairs Sinking Fund – Just like a car, you know your home will eventually need repairs. Because this is an expense that is inevitable, you need to be saving up for home repairs that will come along when you own a home.
- Water Bill Sinking Fund – Many areas have annual or quarterly water bills where several months add up before payment is due. When these big, irregular water bills hit it is helpful to have the money in a sinking fund ready to pay the bill.
- Pet Expenses Sinking Fund – Your pet may require regular grooming, special medicines for health issues, special diets and foods, and of course regular vet care. That’s not to mention anything like toys, doggy daycare, beds, clothing or any fun pet expenses. Add in an expensive emergency vet visit and you’ll definitely be glad you have a pet expense sinking fund.
- Christmas Sinking Fund – Christmas happens every year so it should not catch you by surprise and lead you into debt. Your Christmas sinking fund can be for gifts but also for things like decor, Christmas cards, foods for special dinners or anything else for the holidays.
- Gifts Sinking Fund – Throughout the year we buy gifts for birthdays, weddings, holidays, baby showers, house warmings and more special occasions. While we love gifting those around us with things they will treasure, it can definitely add up and ruin the budget if we don’t plan for it! We put a little bit into our gifts sinking fund each month and it usually builds up so we can buy gifts when they are needed.
- Clothing Sinking Fund – You might not buy clothes every month, but you will eventually need to buy clothing or shoes as items wear out. You can save up a little each month and then eventually buy a higher quality item when you are ready to shop and replace items.
- Travel Sinking Fund – Travel is generally a high price tag item which is why many people create a travel sinking fund to save up for trips. If you save just $100 a month into a travel sinking fund then you can take a $1,200 vacation each year. If you want to travel more or go on better trips then you can increase the amount you save monthly.
- Car & Life Insurance Bill Sinking Funds – Many life insurance bills and car insurance bills are due every 6 months, quarterly or yearly. We pay our car insurance every six months, so we put money monthly into a car insurance sinking fund. Then when the payment is due we withdraw the amount, pay the bill, and start over again!
- Medical Bills Sinking Fund – Unfortunately medical bills can be a huge financial problem in the United States. A sinking fund (or a medical FSA or HSA) can help make these irregular costs more manageable when they come along. If you have a very high deductible you need to be saving each month into a sinking fund for medical expenses that could come up. Your life will be much less stressful if you have the money saved when a medical emergency strikes.
- Back To School Expenses Sinking Fund – If you have kids, then you probably want a “back to school” sinking fund. You’ll need clothes and school supplies when school season rolls around. Kids also have a lot of expenses for signing up for extracurricular activities at the start of the school year.
- Yearly Renewal Sinking Funds – If you have memberships or subscriptions that renew yearly like Amazon Prime or a Costco membership, they can be put into a yearly sinking funds account. You can create individual sinking funds for each yearly expense item or you can create a “yearly expenses” account where you add up the amount of all items, divide by 12, and save that amount each month.
More Sinking Fund Ideas
While those 13 sinking funds are common ones many people use, there are lots of other options that might work for your budget.
- Homeowners insurance
- Property taxes
- Pool maintenance
- Home improvement projects
- New vehicle tires
- Fees and licenses (car registration, etc.)
- Fees for boats/ campers/ snowmobiles/ motorcycles
- Dues and subscriptions
- School and education fees
- School tuition
- Summer camp fees
- Kids sports and activities
- College savings
- Electronics replacements
- Outside decor
- Dentist visits and bills
- Eye doctor/ glasses/ contacts
- Annual gym fees
- Emergency fund
If you are looking for ideas this list should help get you started!
How do you set up sinking funds?
Setting up sinking funds with many online bank accounts is very easy and super quick! From start to finish most banks have made the process of setting up sinking fund savings accounts very easy.
If you want to see how we set up our sinking funds originally along with all the info about what sinking funds are then you can see the whole process in the video below.
Setting up sinking funds is a great way to keep your budget together throughout the year so the ups and downs don’t derail you.
If you haven’t tried out sinking funds before then you should definitely try incorporating it into your budgeting routine!
Mary is the founder of Pennies Not Perfection where she shares her journey to build wealth through online income. She quit her day job in 2021 after she paid off her debt and doubled her 9-5 salary.
Mary's favorite free financial tool is Personal Capital. She uses their free tools to track net worth and work toward to financial freedom.