Chefette&Little What are They? Should I Have Them? How do I Create One? If You’ve Ever Asked Yourself Any of These Questions This Post is for You!
This is for informational purposes only. For financial or legal advice, consult a professional. View the DISCLAIMER for more information.
What is a Sinking Fund?
A sinking fund is a way to set money aside for specific savings goals. These funds are intended to cover infrequent planned or unplanned expenses and can cover large purchases. Big expenses that occur infrequently can really bust a budget, however you know that your tires need replacing every few years, the holidays come around at the same time each year, and home repairs are surely to be needed periodically. When these expenses come up it can be really difficult to find extra funds in your monthly budget to cover them. So how do you cover the? Most can agree that paying for holiday gifts doesn’t constitute an emergency so you don’t want to drain your emergency fund to pay for this, many turn towards credit cards or payment plans to cover these but with interest this can become very costly and will put you into debt (or further into debt if you’re already carrying some). This is where sinking funds come in handy.
Sinking funds allow you to set money aside each month into dedicated accounts for specific savings goals. This will allow you to save overtime for these infrequent expenses. Having these funds will help you avoid tapping into your emergency fund when it’s not truly an emergency and avoid you from going further into debt.
How Much Should I Have in These Accounts?
The amounts in these accounts is totally up to you, if you know that you plan to spend $1000 on Christmas this year and have 6 months to save up for it you would divide $1000/6 which comes out to $167 so you’d plan to save $167 per month to reach this savings goal. If you want to save 2% of your home’s value each year for maintenance and repairs, let’s say your home value is $300,000 that would equal $6000 per year or $500 per month. You might not spend all of this money each year but the years that bring more expensive repairs such as a new roof or HVAC replacement you’ll be relieved to have this money set aside.
If one sinking fund doesn’t have enough to cover an expense you could use another sinking fund to cover instead of taking on more debt. For instance if you have a vehicle repair cost that is $500 but you only have $300 in your vehicle fund you could “borrow” $200 from your pet fund if you don’t need it right now. If you’re sinking funds are consistently coming up short you would want to re-assess how much you are saving and/or modify your spending to fit within your sinking fund limits.
Common Expenses to Use Sinking Funds For
You can use a sinking fund for any goal or expense that you have. They are there to fit your needs, so they will look different for different people. They can be ongoing expenses that occur irregularly such as property taxes, a big one-time expense such as a house down payment, or expenses that aren’t planned but also aren’t unexpected such as pet care. While you certainly aren’t planning to pay for an emergency vet bill after your dog breaks his leg you also know that this is very likely to occur since you’re a pet owner and setting money aside for this will allow you to avoid the stress of the “how am I going to pay for this,” moment, instead you can solely focus on managing the actual pet crisis without financial worry. Regular expenses that you pay monthly such as utility bills, and your gym membership should remain in your monthly budget.
Some common examples of sinking funds include:
- Gifts
- Vacation
- Continuing Education
- Children’s extracurricular activities
- Vehicle maintenance
- Home maintenance
- Pet care
- Home upgrades (furniture, appliances, water filtration system, etc)
- Taxes
- Holidays
- Medical expenses
Your sinking funds can differ over time as your needs/lifestyle changes and you meet current savings goals. Personal finance is personal (as Tori from Her First 100K likes to say), so your sinking funds should reflect you and your current priorities in life.
Sinking Funds Versus Emergency Fund
While they are both types of savings accounts and can definitely provide peace of mind in life’s crisis moments. Your emergency fund should be reserved for catastrophic emergencies such as a job loss, or medical emergency that puts you out of work. This fund is intended to help you pay your regular monthly bills during this time of crisis while you get yourself back on your feet.
While some car or home repairs can certainly arise emergently, by saving specifically for them in a sinking fund you can avoid tapping into your emergency fund to cover them. Your sinking funds are savings set aside in addition to your emergency fund. If you don’t have an emergency fund that should be your first savings priority, be sure to check out my blog post all about emergency funds.
Where Should I Store My Sinking Funds?
While you want your sinking funds to be accessible you also don’t want them to be too easy to get to if your one who easily falls into impulse spending. For instance storing these in your main checking account that can be easily spent with your debit card probably isn’t the best idea.
I would also avoid storing these in an investment account as these funds aren’t easily accessible and you will incur taxes and fees by selling stock to access these funds. I also wouldn’t store these in envelopes around your home in the form of cash because of the impluse spending urge but also if the envelopes are stolen or lost you cannot get these funds back and the money along with your hard work of saving said money will be wasted.
Your best bet for storing these funds is in either a regular savings account or better yet a high-yield savings account. Many banks have an option within their HYSA accounts to set up “sub” accounts where you can set money aside for dedicated purposes so you may not even need to have a bunch of different accounts open but one primary account and then these sub categories to define the intention of that pool of money. For more on HYSA check out this blog post here.
Should I Use Sinking Funds?
You’re going to be the best one to answer this, obviously you could just have one savings account that you pull from any time a planned or unplanned expense arises. But for many people strategically saving for your financial goals using sinking funds can be both mentally and financially beneficial. They can provide peace of mind for you and also avoid spending guilt when it comes time to make that big purchase that you’ve been saving for since you’ve set money aside into a sinking fund specifically for that purpose!
You definitely want to avoid having too many sinking funds as this can stretch yourself too thin. Having too many savings goals at once can be really overwhelming, how much you can set aside in these funds will depend on your budget and your other financial priorities.
Final Thoughts/Key Takeaways
Sinking funds are savings that you intend to spend for a specific purpose. Having money set aside for home repairs or your next family vacation can help you avoid stress during an already stressful time of emergency and also can help you avoid guilt with spending and can help you avoid going into further debt.
If you don’t have an emergency fund yet I would recommend setting saving for this as your first savings goal. If you already have your emergency fund set up and funded look back over your most recent reverse budget. Were there any examples of expenses coming up that were difficult to cover with your monthly budget-a vet bill, a baby shower gift, thinking ahead to the holiday season? If you are able to identify some areas where having a sinking fund could have helped avoid stress, strain or further debt it may be a good idea to set up a sinking fund for this. Start small with nor more than 3 funds, set your goal amounts and get started saving! If you can set aside money each month from your regular income to meet these goals that is great, maybe you sell that old spin bike you’re not using and put that money into your sinking fund, or maybe all cash back rewards you receive from your credit cards will go straight into a sinking fund, every little bit will help you get closer to your goals!
Let me know in the comments below if you have sinking funds or are interested in starting some! In this budgeting series we’ve covered setting up your budget, developing a debt payoff plan, building an emergency fund, and now saving with sinking funds to meet your goals. Let me know what you thought of this series, has it answered any questions you may have, has it prompted more that I haven’t covered, be sure to let me know!!!
