A weekend trip to Boston. Tickets to a concert featuring one of my favorite musicians. A week-long visit to the west coast. Dinner at a nice restaurant to celebrate a friend’s birthday.
These are all things I spent money on in 2019. They’re also all purchases that had the potential to break my budget. By utilizing one of my favorite budgeting tools, however, I was able to indulge in these experiences guilt-free—and keep my financial progress from derailing. So, what’s this magical tool, you may ask? Sinking funds.
What Is a Sinking Fund?
A sinking fund is an amount of money set aside for future use and earmarked for a specific category that is often built up through a series of smaller contributions over a period of time. Sinking funds are like mini savings accounts that are meant to be spent, on expenses both necessary and frivolous, planned and unplanned.
Types of Sinking Funds
Sinking funds generally fall into two categories: funding for planned expenses vs. funding for unplanned expenses. An example of a planned expense sinking fund is Christmas—an event that you know is scheduled, and for which you know you’ll need some extra money. An example of an unplanned expense sinking fund is car repairs. You may not know when your car will break down, or how much it will cost to fix, but you know that this situation will happen at some point down the road, and having some money set aside will help protect your budget.
A sinking fund is an amount of money set aside for future use and earmarked for a specific category that is often built up through a series of smaller contributions over a period of time.
As with everything in your budget, sinking funds are personal, and should be designed and adjusted based on your needs. Budgeters who thrive on planning may have twenty sinking funds, while others may only find it necessary to have two or three. There’s no magic number; just remember that sinking funds exist to help you achieve your goals and give you peace of mind.
Why Should I Use Sinking Funds?
The number one reason to use sinking funds is to keep yourself financially healthy. Just as fruits and vegetables are an important part of any balanced diet, sinking funds are crucial to a balanced budget. They can help you stay out of debt, and they can act as buffers to your emergency fund.
In my own experiences, I’ve found sinking funds to have a notable influence on my saving habits. Prior to my life as a budgeter, I’d often find myself spending carelessly whenever I had money left over after paying my bills. Just a few months after I began directing that surplus into sinking funds, though, I saw just how much I’d been wasting, and realized how much more useful that money could be when designated for specific purposes and goals. In just under three years, I’ve saved close to $20,000 across my various sinking funds! Seeing this progress has motivated me to be more proactive with saving for my emergency fund and retirement.
Another great thing about sinking funds: they let you have fun, guilt-free! Use sinking funds to pay for your next vacation, or to save up for an indulgent day at the spa, or to earmark money for donations to causes and charities that you truly believe in. Sinking funds give you permission to enjoy your life and to spend on things that make you happy, all without sacrificing the progress of your financial journey.
How Do I Use Sinking Funds?
Sinking funds are easy to incorporate into any budget! Simply determine the categories that fit your needs, the total amount you’d like saved in each category, and whether or not there’s a deadline for reaching that amount. In some cases, determining your totals and timelines will be clear-cut; in others, not so much.
Here’s an example: it’s the beginning of the year, and you’re planning a Hawaiian vacation for the first week of July. The trip will cost $3,000, and you have six months (January-June) to save. By sending $500 into a sinking fund each month for the next six months, you’ll have enough saved by the start of your trip to cover its costs completely.
Here’s another: after your car breaks down and you feel the sting of pulling money from your emergency fund, you decide to set up a sinking fund for car repairs. You begin setting aside $50 a month. A year and a half later, you get a flat tire that costs $300 to replace—only a portion of the $900 you’ve got saved for such an event.
Sinking funds give you permission to enjoy your life and to spend on things that make you happy, all without sacrificing the progress of your financial journey.
Sinking fund contributions are not set in stone, and can fluctuate every time you do your budget. Some categories may consistently get funded with a set amount, while others may others may see irregular contributions of various sizes. Similarly, categories can and should be regularly evaluated, added, eliminated, and/or adjusted, dependent upon your needs.
Where Should I Keep My Sinking Funds?
At first glance, the storing and tracking of sinking funds can seem overwhelming, especially if you have more than a handful of funds. But there are ways to simplify the process.
Some people prefer to keep their sinking funds in cash, using envelopes to keep separate their various categories. Others keep the money lumped in with their emergency fund and use a spreadsheet or a notebook to keep track of their balances. Online banks such as Capital One and Ally allow users to set up multiple accounts or categories within a single account, making it easy to disperse money across various categories and access a clear overview of each fund’s balance. Capital One’s 360 accounts are especially popular with many proponents of sinking funds.
Personally, I choose to store my sinking funds in the bank, in an account separate from my emergency fund that holds the balance of all of my funds combined. I have a breakdown of the balances by category in my budget spreadsheet, which I also use to track the amounts in and out of each fund every month. Again, there’s no right or wrong way to store your sinking funds, but it is important that you commit to tracking their balances to ensure that your money is being spent according to your plans and values. Because, as I hope I’ve made clear, that’s really what they’re all about.
Big City, Small Budget 