Sinking funds have been a vital part of our budget almost since the beginning. The day we received a once-a-year bill and had to scramble to get the money together to pay it, I decided that we’d be much better off saving all year round for such an expense.
We currently have 12 sinking funds that help keep “surprise” bills from throwing off our budget. They also help us save up for fun stuff, like Christmas and birthday presents!
What are Sinking Funds?
A sinking fund is an account that you regularly put money in so that you can gradually save up for a bill or expense. See our definition of sinking funds.
The truth is that there are very few actual surprise bills or expenses in our lives. We know that Christmas comes every December, so why not save up a little bit all year for it? Quarterly insurance payments or yearly life insurance bills are no surprise either. You can divide the amount you’ll owe by the number of months (or paydays) until it’s due. Add money into your sinking fund so that you’re ready.
Even emergencies can be planned for with a sinking fund. You might not know what the emergency will be or when, but life happens and you can be ready. If you regularly add money to an emergency sinking fund, you’ll probably have what you need when the unexpected happens.
We have multiple sinking funds that we add money to each month, including:
- Birthday Gifts
- Life Insurance Bill (yearly)
- Car Repairs
- Clothes and Shoes
- Water Bill (quarterly)
For more ideas on sinking funds you may want, I have a list of 18 sinking funds to think about adding to your budget.
3 Ways to Create Sinking Funds
There are three main ways to handle the logistics of keeping sinking funds. This is the personal part of personal finance. Choose the method that makes the most sense to you or that seems the easiest.
You can use cash to create your sinking funds. Each month or each payday, simply take out the amount of cash you need for each of your sinking funds and place that amount in a designated envelope for that fund.
This is a really physical way to see your funds. It’s also nice because you can keep the money for each fund separate.
The concern is that you may be keeping a lot of cash around, so it might be best to use this method for smaller sinking funds, like if you’re saving up for a nice birthday present for your spouse. If you think that you’re likely to dig into your cash sinking funds when you feel like going out for ice cream, then it’s probably not a good idea for you to use cash sinking funds.
If you have a safe place to keep the cash, you’re saving a relatively small amount, and you know you won’t be tempted to spend it, keeping cash sinking funds is a good choice because it keeps things nice and simple.
One Separate Account
The second sinking fund method is to open a separate savings account that you use for all of your sinking funds. To do this, you’re going to need a ledger where you can keep track of how much money is designated for each sinking fund within the single savings account.
This is the way my mom kept track of things growing up. She had a separate page for each sinking fund where she would write down the money added to or spent from that fund. Then she kept track of the whole balance of the savings account to make sure it all balanced each month.
This method only requires you to have one extra account. You could open this at your current bank and easily transfer money from the sinking funds into your checking account as you need to spend the money. You could also open an account at different bank if you need to make it harder for yourself to access this money.
With a savings account, you can easily set up an auto deposit for each month so that you don’t have to worry about transferring money into the account. This makes saving money in your sinking funds fairly effortless.
It’s a little more complicated to keep track of the balances of each sinking fund when all of the money is in one bank account. You wouldn’t wanted to overspend Christmas money from the account and then not have enough to pay a big bill. You’ll need to keep a detailed ledger of what sinking funds the money is designated for.
This is the method that I personally use. Some banks will let you open multiple bank accounts. You can check with your bank to see how many savings accounts they allow you to open.
Capital One 360 is an online bank that allows you to open up to 25 savings accounts. You can link them to your regular bank to transfer money back and forth (note: there are limits on the number of transfers you can make per month and it takes a few days for the money to get there).
You can then create a separate bank account for each one of your sinking funds. With Capital One 360, they allow you to nickname your accounts, so I literally have accounts named ‘Christmas” and ‘Life Insurance’.
The best part is that the money for each sinking fund stays separate and you don’t need to keep a ledger of what money is for what. This keeps it nice and simple in my mind. I can clearly see how much money I have saved in each sinking fund.
You can easily set up an automatic deposit so that the savings is done for you.
Your bank may not allow you to open multiple savings accounts. If you use an online bank, there is usually a time delay when you transfer money from one account to another and there’s no physical bank location to go take the money out of. This hasn’t been a problem for us in the years we’ve used an online bank.
For us, I pay everything with our credit card throughout the month. At the end of the month, I transfer any money I need out of our sinking funds into our normal checking account to pay off the credit card in full.
By using sinking funds, we’ve been able to save up for irregular bills and be ready for fun stuff, like paying for Christmas presents!
When you’re sticking to a budget, you really don’t want anything to be a surprise. The good thing is that you can plan for pretty much any kind of expense. You can even sink money into an emergency fund as a way of expecting the unexpected.
Any of the sinking fund methods explained in this post will work. You can choose whichever methods seems easiest for you!
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