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Learn which sinking funds categories to include in your budget to save money and avoid financial surprises.
If your financial life were a house, your budget would be the foundation it’s built on.
A budget is your plan for how you’re going to spend the money you’ve got coming in each month.
And hopefully, you’re including saving in your budget regularly in case a financial emergency happens.
But there’s more to saving than just planning for rainy days. You also have to think about how you’ll save for planned expenses that aren’t part of your regular budget.
And that’s where sinking funds come in.
What Are Sinking Funds?
In a nutshell, a sinking fund is a savings account you use to set aside money for a planned expense.
With an emergency fund, you’re saving money for those “just in case” times when you may need cash to cover a car repair or an unexpected doctor bill.
Sinking funds are different.
These funds are designed to help you save money each month toward a specific expense or financial goal.
Using sinking funds categories in your budget requires planned saving for planned spending.
That’s a really simple sinking fund definition but these funds are so powerful because they encourage you to be intentional with your money.
Why Do You Need Sinking Funds?
The short answer is that sinking funds can save you from coming up short when there’s something you need to pay for that isn’t part of your regular budget.
For example, you might have a recurring expense that you pay bi-annually or quarterly, like car insurance.
Instead of scrambling to come up with the cash to pay that bill when it’s due, sinking funds help you save the money you need little by little.
Including different sinking funds categories in your budget can give you more control of your money and what you do with it.
And you don’t have to just use them for boring expenses, like paying bills. You can also use sinking funds to plan for fun things, like a family vacation.
Once you get in the habit of using sinking funds in your budget, it becomes a lot easier to:
- Manage your budget every month and avoid overspending.
- Get consistent with building a money-saving habit.
- Plan ahead for small and large expenses that aren’t part of your regular budget.
- Set and achieve specific financial goals.
- Make large purchases without triggering financial guilt or buyers’ remorse.
- Include “fun” purchases or spending without racking up debt.
So bottom line? Sinking funds can be a good thing for your budget.
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How to Use Sinking Funds In Your Budget
If you’ve never used sinking funds before, then there’s a little bit of a learning curve to get started.
But don’t worry, it’s not overwhelming. Here’s how it works.
First, you choose your sinking funds categories. (I’ll walk you through which categories you may want to include in your budget a little later.)
Next, you’ll decide how much money you want to take save total for each category.
Then, you determine how much money you need to save each month to reach your target goal.
And finally, you review your budget to see how much you can afford to save each month.
Here’s what a sinking funds example might look like if you have $500 a month to add to savings:
- $100/month for home improvement projects
- $100/month for a family vacation
- $100/month for holiday shopping
- $100/month for biannual car insurance premiums
- $50/month for kids’ activity fees
- $50/month for car repairs
At the end of the year, you’d have saved $6,000 altogether. You’d have
- $1,200 for home improvement projects
- $1,200 to spend on a family vacation
- $1,200 to spend for holiday gifts and other expenses
- $1,200 to cover your car insurance premiums
- $600 to put toward kids’ activity fees
- $600 in a car repair fund
Having those amounts saved in each of your sinking funds categories means that you have the money to pay for those expenses when the time comes.
You don’t have to dip into your emergency fund to cover them.
You don’t have to charge those expenses to your credit card, creating potentially expensive debt to pay off.
Instead, you can transfer money from savings to checking and use it to pay for your planned spending.
Sinking funds can be a huge stress-reliever because they take the pressure off of planning for large expenses.
For example, one way I use sinking funds is to save money to pay my estimated quarterly taxes, which are due four times a year.
I set aside money from my freelance writing income each month in a dedicated savings account. Once it’s time to pay taxes for the quarter, I transfer it to checking and cut a check to the IRS and my state office.
By using sinking funds, my taxes are always paid on time and I don’t have to worry about penalties or interest piling up.
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Where Do You Keep Sinking Funds?
You could keep sinking funds in your checking account. But that can be a problem if you end up accidentally spending some of that money.
The better option is to keep sinking funds in a savings account.
There are a few ways you can do this.
First, you can set up one big sinking fund savings account that holds all the money for each goal you’re saving for.
That’s fine if you’re organized and can keep tabs on how much you’re saving toward each sinking fund expense each month.
The second option is to set up separate savings accounts for each sinking fund.
This is a good choice if you’d rather keep all of your sinking funds separate. Just remember to label each account through online banking or your bank’s mobile app so you know what’s what.
A third solution is to use subaccounts inside your savings account if your bank or credit union offers that option.
With subaccounts, you have one big savings account that you can break up into smaller accounts.
So say one of your sinking funds categories is house expenses. You could set up a house savings account, then set up subaccounts for things like home repairs, home improvements, property taxes, insurance, etc.
There’s no right or wrong way to do it, it all comes down to what works for you.
Just pay attention to the fees your bank charges for savings accounts and the APY you could earn. If you’ve got multiple savings accounts, it pays to get the best rate for the lowest fees.
And if you need a recommendation for sinking funds savings accounts, check out CIT Bank. They offer one of the best high yield savings account options around.
Sinking Funds Categories to Include In Your Budget
Okay, so now you know what sinking funds are and how they work. The next step is deciding which sinking funds categories you should have in your budget.
This step all comes down to what expenses you’re planning and what you want to save for. I find it helpful to start with broad categories, then break them down into individual categories.
Here are some sinking funds examples you can use to get started.
1. Home expenses sinking fund
If you own a home, housing is likely your biggest expense. So having a home expenses sinking fund is a must.
And within that sinking fund, you can include mini sinking funds for:
- Regular home maintenance (like getting your HVAC serviced twice a year or having the gutters cleaned)
- Home repairs
- Home improvement projects
- Property taxes and homeowners’ insurance if they’re not escrowed into your mortgage payment
- New furniture and/or appliances
- Landscaping/outdoor maintenance
- Pool maintenance (I have this in my budget)
- Gas/propane refills (I also have this one)
2. Vehicle sinking fund
Unless you take public transportation everywhere, chances are you have some vehicle-related expenses to cover. Some may be big, others might be small.
When setting up your vehicle sinking fund, consider adding these subcategories:
- Insurance premiums
- Car repairs
- Car maintenance
- Property taxes
- Registration fees
- Replacement tires/batteries
- Detailing and washing (if you don’t do this yourself)
- New-to-you savings fund for when you’re ready to upgrade or replace your vehicle
3. Kid expenses fund
If you’re a parent you know that having kids can be insanely expensive. So creating a separate kid expenses fund just makes sense.
Here are some of the smaller sinking funds you might include in your kid expenses sinking fund:
- Summer camp fees
- Daycare or childcare expenses during the summer if you work outside the home
- Sports activity fees
- Homeschool-related fees if you homeschool (for example, we have to pay an annual fee to our co-op along with field trip fees)
- Back to school expenses
- Private school or college tuition and fees
- Graduation or prom expenses if you have teens
- New baby expenses if you’re growing your family
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4. Medical expenses sinking fund
Health care can knock your budget for a loop, especially if your insurance isn’t that great or you’re uninsured.
Setting up a medical expenses sinking fund is a smart move if you pay out of pocket for:
- Co-pays or deductibles
- Prescription drugs
- Over the counter medicines
- Medical equipment
- Dental visits
- Eyecare, including glasses or contact lenses
- Telehealth visits
5. Pet care fund
We have two dogs and a cat and I love them but man, does it cost money when they get sick.
If you have pets or you’re thinking of getting one, you could set up a pet care fund with mini sinking funds for:
- Routine vet check-ups
- Emergency vet care
- Prescription medications
- Spaying and neutering
- Pet-sitting or boarding services (I spend several hundred dollars a year to board our dogs when we go on vacation)
- Food and treats
- Pet toys
- Puppy pads if you’re potty training a new fur baby addition to the family
6. Holiday and birthday sinking funds
I started keeping a sinking fund for holidays and birthdays years ago after one particularly terrible Christmas when my husband and I had no money to buy gifts for our kids.
It was awful and I swore, never again.
Setting up a sinking fund for holidays and birthdays means you don’t have to worry about that. And you can add in sub-funds for:
- Holiday and birthday cards
- Holiday and birthday gifts
- Seasonal, birthday and holiday decorations
- Holiday or birthday-related travel (sometimes we take trips to celebrate my kids’ birthdays instead of having a party)
- Gift bags and gift wrap
- Holiday and birthday food spending
- Shipping and postage fees for mailing cards or gifts
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7. Travel fund
We love to travel and take trips but we don’t love debt at my house so we have a sinking fund for travel.
Whether you like to see the world as a family or just plan staycations, you may want to add a travel fund to your budget. You can use it to save for things like:
- Passport fees if you travel internationally
- Car rentals
- Airfare and hotels
- Cruise tickets
- Souvenir spending
- Travel insurance
8. Self-employment sinking funds
If you work from home or your spouse is self-employed, there are certain expenses you may need to plan for outside of your regular budget.
For example, my self-employment sinking funds categories include:
- Estimated quarterly taxes
- Annual state and federal income taxes if I end up owing
- Laptop replacement (because I use my computer a LOT)
- Health-care sharing expenses (since we don’t have regular health insurance)
- Home office furniture and supplies
- Annual blogging-related expenses, like domain and hosting renewal and Tailwind for Pinterest
- Microsoft Office subscription
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9. Personal care sinking funds
Personal care is important for managing your physical and emotional health, especially if you’re a busy mom who’s always stressing like me.
For example, you might set up personal care sinking funds for:
- Bimonthly haircuts
- Salon visits
- Spa visits
- Pedicures or manicures
- Annual gym membership fees
- Workout equipment if you’d rather exercise at home
- Weight loss programs (or get paid to lose weight with HealthyWage instead!)
- Beauty or grooming products
- Splurge items, like new clothes or electronics
Which Sinking Funds Categories Do You Use?
Adding sinking funds to your budget can help you master saving money and never feel broke again.
Having sinking funds as part of your savings routine puts you in charge of your finances. So if you aren’t using them yet, you could be missing out on a simple way to improve your financial health.
And if you are putting sinking funds categories to work, which ones do you use?
Is there a sinking funds category I missed that belongs on the list?
Head to the comments and tell me about it. Then don’t forget to pin and share this post!