what is a sinking fund?
A sinking fund is a way to save money for a specific purpose (usually an annual expense), by setting aside a certain amount of money each month. The purpose of a sinking fund is to avoid having to come up with large amounts of money for an expense that you can expect every year, e.g. Christmas gifts, a vacation trip or bills you pay annually.
When it comes to budgeting and finances, I’ve learned that the more you can plan ahead, the better your budgeting experience will be. Sinking funds help keep the numbers in my monthly budget fairly consistent, and they also take away any anxiety I have about these large upcoming expenses.
To calculate your sinking funds, divide the total amount you need to save up by the number of months left until you have that expense.
where do I keep my sinking funds?
Aside from the cash I use to stuff my weekly envelopes, I don’t like keeping extra cash at home. I use a separate online savings account with Capital One where I have a sinking fund account and my emergency fund. I keep all the money from my sinking fund categories in one account and I keep track of them using a spreadsheet like the one below.
now onto the 4 sinking funds I started this year:
Christmas Fund ($50/month)
I didn’t have a Christmas sinking fund last year which made my holiday shopping a bit stressful. This year I’m budgeting $600 for Christmas which is about what we end up spending every year.
Vehicle Maintenance ($35/month)
The vehicle maintenance fund is what we use to pay for oil changes, new tires or miscellaneous repairs. There will always be some type of maintenance or car repair needed so we try and keep our vehicle repair fund at $400 by contributing $35 a month.
Travel Fund ($75/month)
Although we don’t know when and if we’re going to be taking a trip this year, I have already started a sinking fund so that we can get a head start on saving up for it. A few months down the road we can reassess and see if we still need to contribute to this fund.
Life Insurance Bill ($45/month)
Our life insurance bill comes out to about $500 a year for both of our premiums. It’s nice to not have to worry about those $500 we need to pay every year.