Have you ever been hit with an unexpected expense like dental work or been stressed over how you’re going to pay for new tires? Funnn right…? I mean who hasn’t experienced something like that? Well the key to avoiding most stressful financial situations is to be as prepared as possible.
But how do we prepare for the unexpected?
Sinking funds are a valuable tool that you can utilize in your budgeting strategy to ensure that you have the necessary funds to pay for any expenses or obligations. Having that money set aside will not only put your mind at ease, but you will have the added benefit of not having to rely on credit cards! As most of us know, credit card debt can quickly get out of hand so avoiding having to use them in these situations can prevent you from a downward spiral into debt.
What is a sinking fund?
A sinking fund is a budgeting strategy that allows you to set aside money each month to meet specific future expenses or obligations. This is very different from a savings account in that you’re not randomly putting aside whatever you can and hoping for the best. A sinking fund is meant to have a specific expense associated with it, whether that be an upcoming medical expense or unexpected (but somewhat expected…because it’s what cars do) car repair bill. The purpose and intent for these accounts are very different and you will need to be deliberate in your planning to get the most out of your efforts.
How do you use a sinking fund?
The best way to use a sinking fund is to determine the number of funds that you want to have and label them by category. For example, you want 5 funds – for vacation, medical and so on.
Now you start by determining how much that trip to Hawaii and braces for your youngest are going to cost. Once you have those figures, you divide the total number (by category) by the number of months until you plan to have the expense and boom – that’s the number that you need to save in that fund each month.
So for example let’s say you’re considering Lasik eye surgery at a top-notch surgical center charging $6,000. Now that you know that you will be spending $6,000, you will need to determine how soon you want the surgery. You decide that you want to have the surgery in six months, so that means you need to set aside $1,000 a month into your medical or “Lasik” sinking fund. Easy right?
If you are looking for more resources to plan your budget, might I suggest downloading my free guide? Get your Money Right Guide HERE.
Now that you know how it works, here are 15 examples of the types of sinking funds that most people should have so you can start incorporating them into your budget. It’s time to get started!
1 – Emergency Fund
While this fund could technically be for any “emergency”, I’m going to challenge you to create this fund with the intention to only use it if you can’t pay for your basic needs (rent, food, utilities). Meaning either you or your partner loses your job or has some kind of medical emergency/condition that doesn’t allow you to continue to work.
That way you know this fund is set aside for essentials and doesn’t end up getting depleted due to a great sale on a mattress you’ve been eyeing or a spontaneous trip to the Bahamas!
2 – Education Fund
Are you thinking about going back to school? Or maybe you want to save for your college student’s books or help them with their tuition? Start by looking up the tuition fees, cost of books, and any other expenses and divide that amount by the number of months until the next tuition is due. Then you’ll be prepared to cover those costs, with no stress.
3 – Vacation Fund
Have you been talking about taking a trip to Cabo for your birthday? Or are your girlfriends planning a girls’ trip to Austin? Sounds amazing! Remember, get the amount that you will need to pay and work backward so that you can effortlessly pay for that vacation. The goal is to do these things without getting into debt. You can do it!
Helpful reminder…vacations almost always cost more than we initial set out to spend. In this category, I would either make a strict “this is my budget, I’m going to figure out how to have the most fun without going over” rule for myself, or budget in a little bit of a buffer.
4 – Transportation Fund
Whether you have a car, want to buy a car (need a down payment) or use public transportation, this is a category everyone should have. Metro passes, annual registration fees, car insurance, Uber rides, gas – it all adds up to a pretty penny, and how smart are you for preparing for those expenses!
Another segment of this fund can be for car repairs because we all know a broken windshield, oil leak or stolen catalytic converter can wreak havoc on our savings.
5 – Home Maintenance Fund
Did your fence take a beating this past winter? Maybe you noticed that your air conditioner hasn’t been cooling quite like it used to, well all of those maintenance expenses are pricey and if you haven’t taken a hard look at your homeowner’s insurance policy – I suggest you do, since there tends to be a lot that is not covered. So be proactive and don’t get hit with a “surprise” bill that could easily be in the thousands.
You could also add a category for appliances or furniture, those expenses are rarely planned for can be quite costly.
6 – Medical Expenses Fund
Is it almost time for your child to get braces? Do you have knee surgery that you’ve been putting off? Well, this is the fund for you to plan for any and all medical expenses. So if your child sits on their new pair of expensive glasses, you can just turn to the medical fund – no need to charge up that credit card.
7 – Child Care Fund
There are many expenses that can quickly eat away at your savings, but few are as expensive as child care. On average child care expenses for infants and toddlers can cost $8,400 a year in California. Did you gasp? I did! That will set just about anyone back, so start setting money aside for that now.
8 – Pet Care Fund
We all love our furry friends, but man do they come at a price! Going on a trip and need to board them? That’s easily $50 per day. Does your pet need regular grooming? Tick/flea medication? And of course, the dreaded emergency bill because the old boy swallowed a chicken bone! Prepare for these expenses because they are not cheap.
9 – Home Down Payment Fund
Buying a home is one of the most exciting things that many of us want to do, but it’s also the most expensive purchase you’ll ever make. Set yourself up for an easy mortgage payment, by setting aside a nice down payment and you’ll be able to live life with a lot less stress for the next 30 years. And… go on a vacation every now and then!
10 – Self-Care Fund
Do you get biweekly manis/pedis? Quarterly haircuts and maybe the occasional massage or facial? These are all expenses that we can typically plan for, so why not set that money aside and enjoy the experience without any unnecessary guilt afterward?
11 – Christmas Fund
Are you bracing yourself each Thanksgiving for the annual Christmas gift free for all? Say goodbye to using your credit cards to get through the holidays and start planning for the holiday we all know is right around the corner.
12 – Birthday Gift Fund
By now, you probably have a list of people that you buy birthday gifts for – mom, dad, partner, siblings, nieces/nephews and a few others. Get your calendar out and determine a budget for each month based on the birthdays in any given month and plan accordingly.
13 – Elder Care or Caregiving Fund
More and more adults are becoming caregivers for adult family members or parents and if your loved one requires additional help or a facility the costs will quickly soar to astronomical prices.
According to Senior Living, assisted living costs can be as high as over $80,000 per year!
Hopefully, you’re not in a state where it is that high, but regardless – you will likely need to plan for elder care or caregiver expenses if you have a loved one that needs it.
14 – Debt Repayment Fund
Do you have credit card debt or student loans? This category would be for those with outstanding debts, so you can focus on gradually accumulating funds to pay off any loans, credit cards, or other financial obligations. This will make it a lot more manageable and you won’t be scrambling each month to figure it out.
15 – Special Occasions Fund
Are you getting married next year or planning a big anniversary trip? A special occasion fund can help you save for any special events like an upcoming wedding or milestone celebration.
According to The Knot, the average cost of a wedding was $30,000 in 2022. That’s a significant amount of money to most of us, so start funding that wedding fund!
Final Thoughts
Sinking fund categories allow you to have a structured and efficient approach to financial planning and budgeting. By proactively managing future financial obligations, you can be in control of your spending and feel confident about your savings. By categorizing sinking funds, you can effectively allocate resources, track progress towards specific goals, and ensure preparedness for various expenses. It’s time to take control of your finances and feel good about achieving your financial goals!
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