11 Essential Sinking Funds Categories to Improve Your Budget
Are you feeling like your hard-earned money just keeps slipping through your fingers? Are you looking for a smart way to stay on top of all the little finances that threaten to add up and trip you up?
This is where sinking funds come in to save your budget! Instead of waiting for infrequent expenses to come along and take away your hard-earned savings, try using sinking funds instead. With sinking funds, these pesky once-a-year expenses can be set aside so there is no surprise when it comes time to pay.
Though this strategy might sound overwhelming at first, I’m here to run down an overview of different categories of sinking fund savings so even if planning isn’t your thing, we’ll take care of business together!
What is a Sinking Fund and Why You Should Have One
Sinking funds are a type of savings strategy that helps you stay prepared for financial obligations, such as large one-time expenses like car repairs, home improvements, or medical bills. By setting aside money into a specific account beforehand and making regular deposits throughout the year, you can avoid feeling overwhelmed by unexpected costs and maintain a healthy budget.
Sinking funds are a great way to save for infrequent expenses. You set aside money each month, or as often as you can, into different categories. When a big expense comes up you have a pool of money to pull from to cover your “unexpected” bill. This helps ensure that when an expense comes up you won’t be scrambling to cover it.
Having multiple sinking funds help keep you from tapping into your other accounts, or, even worse, reaching for the credit card when something big arises. Having emergency funds takes the stress out of your budget and can help you stay on track.
Adding Sinking funds to your monthly budget
When it comes to adding sinking funds to your budget you will need to decide which budget category to add your fund into. This will depend on whether it is a want or need.
A sinking fund for an upcoming vacation would go into the want category.
A sinking fund for replacement tires would go into the need category.
Just go through each sinking fund category and add it to the appropriate budget category depending on it being a need or want.
How much do I need to save?
Another factor you will need to consider is how much money should I put into sinking funds categories every month.
The sinking fund formula is quite easy, you will just take the total amount needed, divided by how many months you have until the money is needed.
Total amount/months = how much to save each month.
Let’s look at a quick example.
If you are planning a vacation that costs $1,000 and you have 12 months to save then…
$1,000 / 12 months = $83..33 / month
Sinking Funds vs Emergency Fund
When it comes to saving up for the future, sinking funds and an emergency fund are often confused; however, they both have their distinct use!
Using sinking funds offers a place to set aside money regularly to cover costs you know are coming up in the future like an upcoming trip or scheduled car maintenance.
An emergency fund differs in that it’s a set amount of cash you keep on hand just in case something goes wrong – think of it as a financial fire extinguisher! You’ll only use this for unplanned expenses such as your deductible after a car accident or other unexpected expenses.
Establishing both types of funds may take some effort but your future self will thank you for having extra spending money when you need it the most.
Essential Sinking Funds Categories
Sinking funds are an incredibly useful strategy for budgeting and ensuring that you have money set aside for larger, infrequent expenses. Setting up these sinking fund categories can be a bit daunting, but with the right approach, you can make sure you’re saving enough to cover your surprise costs without breaking the bank.
Let’s take a look at the essential sinking fund categories you should have.
Car Maintenance Sinking Fund
Oftentimes, one of the most neglected sinking funds is for car maintenance that needs to be done regularly. People forget as the miles rack up on their used car so does the potential for large car repair bills.
The amount necessary to save will depend on the age, miles, and make of your vehicle. A newer car should only require routine maintenance that should only cost you a few hundred dollars a year. These include things like tires, windshield wipers, oil changes, and other standard routine maintenance.
For people with older cars with higher mileage, your expenses could potentially be much higher. As each year increases so does the chance of a major repair needing done.
If you can do your own car maintenance as well as some minor repairs the amount you need to save could be drastically reduced. Keep this in mind when deciding how much you need to save every month.
For newer car owners a monthly savings of around $25-$50 should be a good starting place to cover any routine maintenance that you need.
For older car owners planning for monthly expenses between $25-$100 should put you in a good spot to cover any routine maintenance and leave enough for any repairs that may need to be done.
Medical Sinking Fund
As one of the most essential sinking funds, savvy savers should not overlook setting aside money for medical expenses. Having a sinking fund to cover health costs can come in handy – be it a surprise trip to the E.R or routine yearly blood work.
Having extra money set aside will not only give you peace of mind, but you don’t run the risk of any surprise bills looming over your budget.
When planning an amount to save for your medical bills, you will have to look at your general health as well as the ages and the number of people in your family.
If you have an army of young accident-prone children you are going to need to save more than the average person.
If you are on medications that require frequent blood work this can add up fast.
Vacation Sinking Fund
Planning a vacation can be exciting and fun, but also expensive. Instead of putting the burden of cost on one payment, a sinking fund account can make the costs seem more manageable by breaking them down into smaller amounts over time.
One of the most common types of sinking funds, the vacation fund, is also one of the easiest sinking funds to calculate. You simply take the amount you need to save, divided by the number of months you have to save. Having saved up over a few months will help alleviate the stress of paying a large lump sum for your next family vacation.
Home Repair Sinking Fund
Another sinking funds category that can save you a lot of pain in suffering is preparing for unforeseen home repairs. These costs can range from just a couple of dollars to over $10,000!
To cover lower-cost items like light bulbs or air filter replacements you can set up a small deposit into your sinking funds.
For larger expenses like new appliances or a new roof, it’s best to set up sinking funds separate from your lower-cost home repairs. This is because you are going to need to save for a longer period and it’s easier to keep your sinking funds categories separated.
Christmas Sinking Fund
Christmas comes every year, and every year you seem to be reaching for a credit card to cover the cost of presents! This is the perfect occasion to keep sinking fund money.
Many banks will allow you to open a separate savings account called a Christmas Club Account. These savings accounts allow for a separate area to save money for the Holiday season. Having multiple savings accounts like these are a fantastic way to avoid feeling guilty about your Christmas spending!
Wedding Sinking Fund
Sinking funds for your upcoming wedding is also a great option for newlyweds. Not only is it a great litmus test for how you and you’re soon to be mate will handle money, but it also is just a smart way to save money!
The average wedding cost in the United States is $28,000! This means even if you start saving 2 years in advance for your upcoming wedding, you still need to save $1,167 every month for 24 months!
So if you aren’t going to be receiving any money from the father of the bride, then you better set up a sinking fund and start saving money ASAP!
Home Buying Sinking Fund
Having sinking funds specifically for a home purchase is a great way to plan ahead.
Most lenders want a down payment of 20% of the purchase price, plus closing costs. For a $300,000 home, this is approximately $72,000! For most people saving up this much money is going to take a lot of planning and that is why sinking funds are so important.
Insurance Premium Sinking Fund
Having revolving sinking funds for things like car and home insurance premiums can help reduce your stress when those bills show up. Most insurance premiums are billed twice a year and can be a large burden if you don’t plan ahead. Also, if you are currently billed monthly, there may be a reduction in your premiums if you go to annual or bi-annual payment plans!
Birthday Sinking Fund
Do you find yourself scrambling for money every year for birthday presents? Once again sinking funds come to save the day for you. The nice thing about birthdays is they come at the same time every year. To manage birthday expenses, simply decide on a budget for each person and decide how much to allocate each month.
New Car Sinking Fund
Saving money for a new car may not be something you think about. Most people just trade their car in and have little to no down payment. But, if you can put a decent down payment on your car you can greatly reduce your car payment and free up money in your budget.
Put down an extra $1,000 on your car purchase and you can reduce the average monthly payment by a total of $20!
Home Improvement Sinking Fund
One of the sinking funds my wife and I use the most is the home improvement sinking fund! It feels like we are constantly doing upgrades around the house and they usually aren’t cheap!
As with anything if you can do the work yourself you can save a ton of money. Just make sure you know what you are doing before you start tearing down walls, and have a general contractor at the ready just in case!
Depending on what you have planned or how much you like to do to your house, the sky is the limit when it comes to this sinking fund category. Start by saving $25 a month and increase from there.
Common Mistakes People Make with Their Sinking Funds and How to Avoid Them
Let’s take a look at some traps people may fall into when it comes to sinking funds.
Too many sinking funds
How many sinking funds are too many? This is a personal question that you and your family will have to talk over and come to an answer for. Just keep in mind if you have too many different sinking funds categories you can start to spread out your savings too thin. If you have multiple sinking fund categories, but only have enough money to put a few dollars into each, you will never be able to reach your saving goals.
Not having a specific place for your sinking funds
Not keeping your sinking funds separate from your checking account can be a big mistake. There are a few options for you to help keep track of your sinking funds.
Using cash envelopes is one way of keeping your money separated from your savings account and into different fund categories. Then you can just pull the money out and pay cash when the time comes.
Another option is to tuck away some cash into a high-yield savings account, rather than depositing it in your regular checking account, you can easily keep track of how much you have saved for that much-needed vacation or future purchase.
However, when those funds are not separated from your regular checking balance, it’s easy to get confused and end up spending more than you had intended. This is where a sinking funds tracker comes into play. By keeping good records of where and how much money you have, you won’t run into pitfalls later on.
Conclusion
So there you have it! Sinking funds are a great way to buffer your budget from large and unexpected expenses. They can help you financially plan and avoid sidetracking your budget. With sinking funds, the sky’s the limit; you can watch your money improve and evolve as your needs change over time.
As always, success depends on our ability to learn from our mistakes and analyze our future situations accordingly. We may make mistakes along the way but ultimately, it’s about learning from our mistakes so we can get back on track as soon as possible. So give yourself a hand for taking this much-needed proactive step in building those savings today!
Comment below a sinking fund that has saved you – I’d love to hear about the strategies that worked for you too!
