Sinking Funds. This is a phrase that we hear often in the financial space. If done correctly, sinking funds can be a huge piece to financial peace and freedom. Once I got the hang of them, they helped me pay off over $30,000 in debt and prepared me for when emergencies popped up. Below are five ways that sinking funds helped me manage my money.
Budgeting for Irregular Expenses
Sinking funds allow you to proactively budget for irregular expenses that occur periodically throughout the year, such as car repairs, medical expenses, or holiday gifts. By setting aside money regularly, you can avoid financial stress when these expenses arise unexpectedly. I found that every year when my kid’s sports registrations came up, I didn’t have enough money to pay then. This lead to me putting them on a credit card and then paying them off within the next couple months. Once I discovered how to create sinking funds, I had the money to pay the registrations when they came up.
Avoiding Debt and Emergency Spending
With sinking funds, you can cover large or unexpected expenses using money you’ve already set aside, rather than relying on credit cards or dipping into emergency savings. This helps you avoid accumulating debt and maintain financial stability. When our refrigerator died, we were able to use the “house” sinking fund to purchase a new one. We didn’t have to resort to using a credit card or borrowing from family.
Smooth Cash Flow
By spreading out the cost of irregular expenses over time, sinking funds help smooth out your cash flow. Instead of facing large, unpredictable expenses all at once, you can plan and save for them incrementally, making them more manageable within your budget.
Achieving Financial Goals
Sinking funds can also be used to save for specific financial goals, such as a vacation, home renovations, or a new vehicle. By setting aside money regularly, you can make progress towards these goals without disrupting your regular budget or lifestyle. This was the trick to still reaching goals faster and sooner for me.
Building Financial Discipline
Setting up sinking funds requires discipline and consistency in saving money regularly. By practicing this habit, you develop financial discipline and cultivate healthy money management habits that can lead to long-term financial success.
How to set up Sinking Funds
The best way to find a way for sinking funds is to play around with them and find what will work best for you and your financial situation. Here are the six things that I look and think about when I am creating my sinking funds.
Identify Potential Expenses: Make a list of irregular or periodic expenses that you anticipate throughout the year. This may include things like car maintenance, home repairs, medical expenses, gifts, vacations, and insurance premiums.
Estimate Costs: Estimate the cost of each expense based on past spending or research. Be realistic in your estimates to ensure you’re setting aside enough money to cover these expenses when they arise.
Prioritize Expenses: Determine which expenses are most important or urgent to save for first. Focus on building sinking funds for essential expenses before allocating funds to discretionary or non-urgent categories.
Set Up Separate Accounts or Categories: To keep track of your sinking funds, consider setting up separate savings accounts for each fund or using budgeting software that allows you to create categories for different expenses.
When I got my sinking funds in order, I was finally able to start to saving for retirement. I use Fidelity for this.
To have separate accounts for my sinking funds, I use Marcus for this.
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Automate Savings Contributions: Set up automatic transfers or allocations from your main bank account to your sinking fund accounts or categories. Treat these contributions like regular expenses in your budget to ensure consistent saving.
Review and Adjust Regularly: Periodically review your sinking funds to ensure they align with your current needs and priorities. Adjust contribution amounts as necessary based on changes in expenses or income.
Examples of my Strategy
Here is a chart of how I keep track of my sinking funds. →
I know how much I need to set aside for each item each week or I can do it by month.
For long term funds (vacation, pet, house) I use a high yield savings account like Marcus by Goldman Sachs. For others I use envelopes with cash.
I tend to use google sheets, but I also use binders and budget planners to stay organized. See my recommendations HERE. I hope that this is helpful in your quest to start creating and using sinking funds. I would recommend them to EVERYONE! They truly saved my finances.