What is a sinking fund and why do you need one? Well really, you will need more than one, but the short answer is this. A sinking fund is just a mini savings account or money bucket where you temporarily stash some cash for upcoming needs or expenses.
It’s not like a money jar where you throw your spare change randomly. This fund is for a specific purpose and usually has a goal date.
Why use a sinking fund?
Because it will save your budget from failing! It’s the difference between sinking or swimming.
You know that feeling you get when Christmas is approaching and you aren’t prepared to spend money on presents? Even though you’ve known it’s coming for 12 months, you suddenly realize it’s a few weeks away and you are broke. Again.
How about when your best friend’s birthday sneaks up on you and you have no idea what to get her with the $12 left in your checking account? Or, when your dryer finally quits working so that means either hang drying your clothes or pulling out your credit card?
This, my friend, is what money buckets are all about. They can help you plan ahead for upcoming events and expenses, taking all the stress out of the equation.
What should I use my money buckets for?
Predictable Periodic Expenses
One great way to use a sinking fund is for those predictable expenses that only come occasionally throughout the year. Expenses like:
- Insurance premiums
- Property taxes
- Filling the propane tank for heat
Usually, if you pay your car or house insurance up front every six months, you will get a discount. But who wants to turn over $500, or sometimes more like $1200, all at once? So, you opt to pay the monthly amount with the fee added on. But, if you had a sinking fund going, you could be saving up for it ahead of time. And after you’ve paid the first full amount, it would be less than the monthly amount you were paying before that you would have to save for the next round.
Most property taxes are added to your mortgage payment these days, but not always. We own our house and so we have to pay our’s directly to the county. $2400 in January is not small change. Especially right after the holidays. So, putting a couple of hundred dollars into the property tax bucket every month is the best way to make it happen.
Everyone in my neighborhood (if you can call country-living a neighborhood) has a big propane tank sitting in their backyard. That baby has to be filled up several times a year, and depending on what time of the year it is, it can be $400 to $800 per fill. Prepaying in the summer is a great way to lock in the lowest price. It’s definitely an expense you want to break down into a monthly bucket to be refilled regularly.
Upcoming Needs Or Events
Some events, like holidays and birthdays, are very predictable and should be added to your sinking funds. Not only can you plan ahead for them money-wise, but you can also shop ahead to get better deals on gifts.
Other expenses are not quite so predictable, but are somewhat expected if you really think about it. Car repairs and appliance replacements are going to happen.
If your washing machine is 20 years old, it’s pretty likely going to kick the bucket soon. You can start a sinking fund for those kinds of items so you don’t have to dip into your emergency fund every time something quits on you.
Clothes and shoes wear out and need to be replaced occasionally. Wouldn’t it be nice to have money set aside for shopping. Way more fun than stress shopping.
Sinking Funds For Larger Expenses
Some needs, or even wants, cost a lot more, like a new roof, a car, or a nice vacation. But these items still work in the same way. You can break down the cost into a monthly amount you should save in order to meet the total cost by your planned date.
Where Should I Keep My Sinking Funds? And How Do I Track It?
How to track and where to keep your stash really just depends on the kind of money person you are. Are you techy or do you like a notebook? Do you like using cash or a debit card? Also, is your fund small and used often or a larger, long-term fund?
Use a Savings Account
I suggest that you open a separate savings account that is linked to your regular checking account. You can park the money for all of your sinking funds in the same savings account and just track the amounts in a notebook or on a money app.
Try Direct Deposit
If you have a set amount you are saving for each fund each pay period, you can even have your employer split your direct deposit into two accounts. You won’t even have to worry about it then. If direct deposit isn’t available to you, you can just transfer it over from your checking account, and then back when you need to pay the expense.
Notebook or App?
I’m a paper and pen kind of gal, so I keep track of my sinking funds in my budget notebook. I keep a running total of what’s in each one and make sure my funds balance with my bank total every payday.
But there are some really cool apps out there that can be used, too. Once you’ve set up your categories in the app, you can just divy each paycheck up on payday.
Two great apps are YNAB and EveryDollar. I don’t use them and am not an affiliate partner with them, but you should check them out if you are the techie kind of budgeter.
YNAB, or You Need A Budget, is a really simple app that is fun to use. Their website explains how to set everything up and gives lots of tips for budgeting. It’s free to try for 34 days, but then you have to pay for it.
EveryDollar is free for the basic version and is also simple to set and use. If you get the paid version, you can connect it to your bank account for more fun.
However you decide to set up and track your sinking funds, the important thing is to start using them to stay in control of your money. Keep filling your buckets and watch the stress disappear.