Choose your sinking fund categories to save more money
If you have difficulty with saving money for all of your upcoming expenses and financial goals, then having a few sinking funds will help you immensely.
Creating multiple sinking fund categories will allow you to improve your financial health, by keeping your funds organized and on target with your savings goals.
Stop using your credit cards and barely making the monthly minimum payments because you failed to plan ahead. Instead, set aside money for specific purposes over time, and you’ll be able to pay cash for whatever needs arise.
Before we get to those essential sinking fund categories that will help you reach your money goals, let’s briefly go over what sinking funds are and how they’re useful.
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What is a sinking fund?
A sinking fund is a dedicated sum of money, typically saved up over time, for the purpose of meeting a specific future expense.
You can use a sinking fund as a strategic way to pay for an upcoming purchase in cash. With a sinking fund, you save a set amount of money over time, in a separate account, until you achieve your short- or long-term goals.
Here are a few planned expenses you can cover with sinking funds:
- Medical costs (co-pays, refills for prescription drugs, etc.)
- Auto maintenance costs
- Travel costs (such as accommodations, passport fees, travel insurance, etc.)
- School shopping
- Federal income taxes
- Annual family photos
- Irregular monthly utility bills
And much more!
This is a great way to meet your expenses and make new purchases without going into debt.
What is the difference between a sinking fund and savings account?
Although they sound like the same thing, these two types of funds serve different purposes.
Unlike a regular savings account, a sinking fund is created for a specific expense, or category of expenses.
For example, you could have a sinking fund just for your kids’ braces, or you could choose to create one for your children’s expenses in general. This might includes braces, as well as education, daycare, field trips, etc.
In contrast to a savings account, a sinking fund will often have an exact savings goal attached to it. Using the braces example, you may set a sinking fund goal of $2,000 per child. Once you reach this amount, you would no longer need to keep adding to the sinking fund.
A sinking fund may also have a set date for using it. If you have a child who will need braces in one year, then you know the specific block of time you need to save, so the funds will be available for payment. Once the funds are used, you would no longer need that sinking fund.
You might use the same type of savings account (online, high-yield, etc.), but they are used for different purposes.
What is the difference between a sinking fund and emergency fund?
You may also wonder if there’s a difference between sinking funds vs. emergency funds.
The short answer is *yes* – there’s a big difference.
A sinking fund is for a known expense you’re anticipating in the distant future.
For example, an auto maintenance fund could be dedicated to planned costs, like oil changes, new tires, tune-ups, etc, so you always have reliable transportation.
An emergency fund is for those *unknown* expenses that are necessary but unexpected costs.
An emergency fund would be used to pay for unexpected car repairs, such as a mechanical issue or body damage from an accident.
A medical emergency or a job loss would also be considered financial emergencies, and should be covered by your emergency fund.
Also, your emergency fund should cover 3-6 months of essential expenses to cover your day to day bills if you’re out of work. The amount for a sinking fund will depend on the cost of the expense you’re saving for.
The difference lies in what is known versus unknown – and both should be planned for!
What is the point of sinking funds?
The reason sinking funds are important and effective is because they can help you avoid using debt for purchases you’re expecting to make. This usually happens when larger bills come due, but they’re too much to cover in a single month’s budget.
And, of course, racking up debt like credit card balances, auto loans, and medical bills, can lead to a host of other financial problems.
An excessive amount of debt can affect your credit score, reduce your disposable income, and limit the available financial opportunities you have.
Your savings capacity also suffers because you have to use a large portion of your income to pay off your balances. This, in turn, keeps you from building financial independence for your future.
Using sinking funds effectively and consistently will allow you to live within your means while building financial security.
There are many other benefits to using sinking funds, which we’ll go over a little later. First, let’s go over some of the most common types of sinking funds you could include in your financial plan.
Choosing from 39 general or specific sinking fund categories
As you can probably guess, creating multiple sinking funds can help you achieve a variety of financial goals simultaneously. Having a dedicated fund for each expense will keep you focused and on track.
Choosing categories for your sinking funds is a way to stay organized with your finances. You can create general categories, or be more specific with each one. You also need to ask if each fund is either a one-time savings fund, or an ongoing, permanent fund.
In the following list, I’ll give you some ideas for both. Choose from those sinking fund examples that fit your situation, and start implementing sinking funds as part of your budgeting strategy.
All together, you have 39 sinking fund categories to choose from.
1. Annual renewal expenses
Are you always caught off guard when an annual bill shows up in your mailbox? You don’t have to be! Plan ahead and set aside a little bit every month, so you’re prepared when that expense comes due every year.
Listed below are a few ideas of annual expenses you could plan for. Create a broad category called “Annual Renewal Expenses”, or individual categories for each one. Whatever works for you!
If you can pay your insurance premiums in full (as opposed to monthly payments), you’ll probably save a considerable amount. I was paying our life insurance premium every month, until I realized one annual payment saved us $80 a year.
You know you’ll have to pay this once a year. So, why not save up for it instead of scrambling at the last minute?
This can be any ongoing service that you subscribe to on an annual basis. We have a GPS tracker on our teen’s vehicle that we pay for once a year. It’s a little pricey, but worth the peace of mind. Other services might be magazines or newspapers, Amazon Prime, online storage, or streaming providers.
Many times, one annual payment for memberships will save you a good amount of money over paying monthly. This could apply to your local gym, organizations like AAA and AARP, museums and movie theaters, or professional licensing fees.
2. Medical expenses
Although regular health insurance probably covers much of your health care costs, it’s still smart to set up a medical sinking fund for any medical care that’s out of pocket. This way, expenses like prescription medication and therapy sessions don’t tax your budget every month.
Or, choose from the following sinking fund categories that fit specific expenses.
If you have a high-deductible insurance plan through your employer, you might be able to set up a Health Savings Account as your medical bill sinking fund.
It’s tough to know sometimes how much your doctor’s bill will actually be, so stay ahead of the game by adding money to this sinking fund category every month.
Unless you’re fortunate to only need a semi-annual cleaning, dentist bills can take a big bite out of your budget. Plan ahead and save up.
Our vision insurance pays up to a certain amount for an annual visit and new glasses or contacts. But, my kids *always* seems to choose new frames that cost a little extra.
Can’t say enough about the benefits of talk therapy. If you need some extra support for a difficult life circumstance, I encourage you to find a trusted counselor you can talk to. It’s probable your medical insurance won’t pay for it, though – so make sure you have some money set aside when you really need it.
Prescription and over the counter medicines
I just paid over $200 for one 3-month prescription. I about choked on the pharmacist’s words as she told me the final amount – *after* insurance.
Set some aside so this expense doesn’t stress your budget while you’re trying to improve your health.
If you’re not expecting to go to the hospital any time soon, you might just want to use your emergency fund or HSA to cover these costs. But, if a hospital stay has unfortunately become a common circumstance for you, try to have a separate savings account to meet this expense.
3. Home & Household expenses
Taking care of your home is one of the best investments you can make. However, house expenses can get quite costly, especially if yours is older.
Start setting aside money into this sinking fund category so you’re able to keep up with maintenance and improvements without getting a home equity loan.
Here are a few more specific categories you could add to your house savings fund:
This type of expense is irregular and will vary in cost, but not unexpected. Save for indoor and outdoor maintenance expenses such as gutter cleaning, landscaping, or roof repair. This way, you won’t have to take money from the grocery budget to replace that broken water heater.
New windows, flooring, or hiring an independent contractor can all add up quickly. Set aside money every month so you can afford improvements on your biggest asset.
Furniture & Appliances
New furniture and appliances can be one of those purchases that’s decided on impulsively. This usually means opening a new line of credit to cover the cost. Avoid more debt, and set a goal to save up a certain amount by a specific date. Then, upgrade your living spaces with cash in hand.
Property Taxes/Escrow payments
Most mortgages bundle your property taxes and homeowner’s insurance into the monthly payment. But, if you prefer to keep these separate, you can pay for your property taxes annually or twice a year.
Also, it never seems to fail that my lender finds my escrow balance to be insufficient, which makes my monthly payment go up (every year? really?). Save now so you’re not caught off guard. You can increase your escrow balance with one payment and keep your mortgage payment the same.
Who doesn’t want to get rid of their biggest expense? Can you imagine how much financial breathing room you’d have without that humongous mortgage payment every month?
Setting a long-term savings goal like paying off your mortgage might sound impossible, but it’s really not! Create a sinking fund called “early mortgage payoff”, then start adding every extra dollar of income that comes your way. Monetary gifts, job bonuses, pay increases, etc. – add it all to this fund and make one huge extra payment once a quarter. Aim to be a debt-free homeowner by the time you retire!
House down payment
Similarly to paying off your mortgage, you could put any unplanned income into a sinking fund for a new home down payment. Aside from saving for retirement, this might be your biggest savings goal. A down payment for a house could set you back 20% of the purchase price – which will require tens of thousands of dollars.
Typically, the equity in your current home will provide the majority of this cost once you sell it. But, if you want to minimize your monthly mortgage payment, you’ll want to maximize how much you have for the down payment.
4. Personal expenses
I think of personal expenses as discretionary purchases that enhance the quality of your life. A new outfit, a trip to the spa, all of those scrapbooking materials. These things are *personal* to you and can bring you added joy – so take care of yourself in a responsible way by saving money for them.
Clothing / Wardrobe
Having a sinking fund for new clothes can prevent impulsive, emotional overspending and credit card charges. Set money aside for these extra expenses so you can buy a new outfit without the guilt.
A personal care sinking fund would cover massage appointments, hair coloring and styling, facials, or a weekly yoga workout.
What do you enjoy doing in your time off? Chances are, it costs some money. Have your own dedicated fund for having fun.
Making charitable contributions is a personal decision, and it *will* enhance the quality of your life. If you want to make a difference by donating money, create a sinking fund to ensure you can give to a good cause without putting your regular budget in jeopardy.
5. Kid expenses
I’m sure you love your kids, but they’re sucking your wallet dry. The U.S. Department of Agriculture reports that the average cost of raising a child to 18 years of age is over $272,000!!! And this doesn’t even include college!
Decide what’s important to you as you’re raising your kids, and then create a separate fund for kid and baby expenses to start saving for those categories. Some possibilities might include:
If you have insurance, you’ll probably get at least half of this cost covered. Start saving now for the other half, so your kids can have a nice smile before they head off to college.
This could be private school tuition, school supplies, expenses associated with playing sports, going on field trips, etc. By intentionally saving money in a separate fund, you can be assured that your children can participate in those school opportunities that interest them.
I took private piano lessons when I was a girl, as well as ballet and horseback riding. I’m thankful my parents were able to give me these opportunities, as I was growing up and exploring my interests.
Whether you need childcare full-time or just need a babysitter a few times a month, have a dedicated account to meet this expense. If you set up a separate kid expense fund for childcare and babysitters, you’ll always be prepared to pay someone to watch your little ones.
6. Family expenses
A sinking fund for family expenses could cover a variety of costs that apply to your family life. From summer vacations to holiday gifts to Fido’s annual vet visit, set aside a little cash every month so you never have to reach for that credit card.
My family just got back from Oahu. About 6 months before we left, I set up a separate fund for travel specifically for this vacation. I created a savings schedule and budget. I knew how much I needed to save each month so we’d have enough money by our departure date. We paid for the entire 10-day extravaganza in cash! It felt great to come home and not have any credit cards to pay off.
Set up a travel fund so you can create amazing family memories together! Having a specific trip in mind will help you budget appropriately.
This could include throwing birthday parties, attending (or paying for) weddings, going to sporting events and concerts, etc. Basically, any special event that has a significant cost attached to it. Set up a sinking fund for holidays and birthdays and fun outings with the fam, so you can celebrate without going into debt.
If you love to give gifts, you should definitely have a dedicated fund for this category. Set a little money aside so you have cash for birthday gifts, wedding gifts, baby showers, or just because. Don’t forget to cover the cost of gift cards, gift wrap and greeting cards, too!
Aaahhhh … Christmas. Anybody else out there seem to always go over budget around the holidays? I usually start setting money aside in September, so I don’t end up pulling out my credit card for that last minute, *perfect* gift.
Having a separate fund for gifts, decorations, wrapping supplies, cards and postage fees will give you the freedom to spend without charging up your credit cards. You can make this a short-term savings goal and start saving 6 months ahead, or give yourself a longer time period by saving all year.
Your beloved fur baby is an important part of your family, so why not give him his own pet care fund? Save money for vet visits, grooming, boarding, and anything else you spend money on to take care of him.
7. Auto expenses
If you own a vehicle (or two … or three …), then you are well aware of the ongoing costs of keeping one. Aside from filling the tank and going through the car wash (which would probably be a part of your regular budget), there’s also the expense of keeping your car in good shape.
If your vehicle has miles in the triple digits, or it’s just looking a little tired and worn, you could also use this sinking fund category to save up for its replacement. Other ways you could use this sinking fund is to speed up paying off that car loan, or for public transportation costs.
Here are a few ideas for this sinking fund category:
This could include oil changes, new tires, tune-ups, etc. As your vehicle gets older and has more wear and tear, having an auto maintenance and repair fund will help you get out of a bind without going into debt.
Eventually your trusty car will become unreliable, and you’ll need a new(er) one. Start saving now so you don’t have to go into excessive debt with a car loan.
Auto loan payoff
You could use a separate sinking fund to save money for an auto loan balance, or just fit this long-term financial goal into your monthly budget.
How to create a sinking fund
Now that you have many ideas for sinking fund categories, let’s talk about how to actually create one.
Here are 7 steps to create and use a sinking fund to successfully meet your saving goals:
Step 1: Determine your savings capacity
The first thing you must do to set up your sinking funds is determine how much you can save every month.
Go through your budget and decide where you can cut costs. Focus on those variable expenses, such as groceries, dining out, entertainment, clothing, and personal care. Ask yourself, how much do I want to save, and what am I willing to sacrifice?
If you have some *really* ambitious goals, you might want to think about how you can generate more income. A part-time job on the weekends or working a side hustle a couple of times a week can turbocharge your savings capacity.
Step 2: Set some goals
Second, you must decide what you want to save for, and why. Include your spouse and/or the kids, depending on the category. Think about what you value, and how you want to prioritize your savings. Write down some specific goals you can realistically achieve.
Step 3: Estimate the cost
Determine a target savings goal for each expense. This number will be your limit, so you don’t take on more than you can handle.
If your goal is to buy a newer car within the next 18 months, then you’ll have a good idea how much you can afford to put in savings every month. This amount will inform your budget for a new vehicle, as long as you stick to cash.
Step 4: Decide on a timeline
When do you want to spend this money? Is there a time limit to save up, or can you just keep adding to your sinking fund for as long as it takes? Knowing this information will help you plan effectively.
Step 5: Create a budget category for each sinking fund
You know how much you can save, and what you want to save for. Now it’s time to get intentional.
Create a budget category for each of your sinking funds, like they are any other bill. Add the amount of money you’ll save every month. Make sure you balance your budget to ensure you’re not spending more than you earn!
As an example, let’s say you’ve decided to buy a newer vehicle in 18 months, and you don’t want to spend more than $8,000. After you sell your current vehicle, you’ll need an extra $5,000 to make up the difference. This comes to 18 equal payments of $278 into this sinking fund every month.
In your budget template, you would make a budget item for “New Car Fund”, with a budgeted amount of $278 monthly, and pay this like it’s any other bill.
If saving this much every month is more than you can handle, you can either extend the timeline and/or decrease the expense limit. You could also lower your monthly expenses and increase your monthly income to free up more money for your savings goal.
Step 6: Choose where you will save your sinking fund money
Having a separate, dedicated sinking fund savings account for each expense is just one way to save for your goals. You could also use labeled sinking fund envelopes, or even an empty jar!
Putting your money in a high-yield savings account could make you a few extra pennies, but it’s not necessary. The point is to pick a method you can easily stick with.
Check with your bank or credit union to make sure there are no minimum bank balance requirements. You don’t want any unexpected expenses like bank charges while you’re trying to fill your sinking funds!
Step 7: Automate your savings
You’ve done steps 1 through 6, and things are looking really good … on paper. Now it’s time to put your money where your mouth is.
Commit to saving to your sinking funds on a consistent basis by automating deposits to them. This could be done by having your employer set up direct deposits to each account straight from your paycheck. Or, you could schedule automatic transfers through your bank after your check has hit your account.
Either way, automating your savings will eliminate the decision to do it every time.
Multiple sinking funds example
Let’s go through an example of setting up multiple sinking funds.
Perhaps you determine (after going through your monthly bills and lowering a few expenses) that you have an extra $500 a month to add to savings.
Next, you write down several goals you have for your savings, and then prioritize the top 5.
Then, for each of the 5 sinking fund categories you’ve chosen, you set a budgeted amount. You divide this budgeted amount by the number of months you have to save to calculate your monthly savings.
You decide that four of your sinking funds will have a deadline, and one will be ongoing.
This is what you come up with:
Sinking Fund Category
Once you have your monthly savings for each fund figured out, you add each sinking fund category as a budget item in your monthly budget.
After you verify with your bank that they offer a free savings account with no minimum balance requirements or annual fees, you set up 5 separate accounts and label each one accordingly.
Then, you use your bank’s website to schedule monthly automated transfers into each one, for the budgeted amount.
Now, you are well on your way to achieving 5 separate financial goals!
Benefits of sinking funds
There are many benefits to saving money for a rainy day. But, when you’re intentional with aligning your saving habits with specific goals, you can experience a whole new level of achievement.
If you’re still saving “whatever’s left” at the end of the month, in one general savings fund, so you can hopefully have enough to cover any unplanned expenses – then it’s time to learn how sinking funds can help you.
Here are 7 benefits of incorporating sinking funds into your budget.
Sinking funds will help you be prepared to pay for future expenses. No more reaching for the credit card when you’re confronted with a cost you didn’t save for.
Your finances are organized
Keeping your sinking funds separate from your regular savings, and organized into specific categories, will help keep your progress on track. You’ll know exactly how close you are to each savings goal, which helps boost the motivation you need to keep saving.
You minimize debt and interest payments
Probably the #1 benefit of using sinking funds! Intentionally saving cash for known expenses in the future will help you avoid debt, and the added interest that goes with it. The more you can minimize debt, the greater capacity you’ll have to save money.
You can keep your emergency fund for emergencies
As mentioned above, an emergency fund is for the unknown. And, I’m sure you’ve experienced yourself, there can be many unknowns in life. Keep a dedicated emergency savings account so you’re prepared for life’s curve balls.
You avoid impulsive spending
Are you sick and tired of your outdated furniture, or that cell phone you’ve had for 3 years? Don’t let your emotions get the best of you! It’s that moment when you spontaneously decide you deserve (or even better – *need*) an upgrade that you’re in danger of spending impulsively.
Think ahead, save in advance, and set a date to make that purchase. This way you stay in control of your emotions, actions, and money.
You have consistency with a variable income
When you build savings consistently, you create consistency in your finances. This especially applies to budgeting with a variable income.
I had to do this for years, when my husband held a position that paid hourly. There are ways you can manage a variable income to eliminate the guessing, and using sinking fund categories is one strategy that can help you create stability in your finances.
You’ll reduce financial stress
When you’re prepared to cover those costs that align with your money values, you can spend without the stress and the guilt. Dedicating specific funds to an upcoming expense gives you the freedom to use your money responsibly. Take charge of your financial security by using sinking funds for your savings goals.
Use the sinking fund formula
Need to figure out how much you should be saving every month? Here’s a simple sinking fund formula to help you out. This formula will calculate the amount you need to save monthly so you hit your goal on time.
All you have to do is determine how much you need to save, and when you plan to spend it.
Total savings goal ÷ # of months to save = Monthly sinking fund deposit
For example, if you want to go on a family vacation a year from now, and you want to budget $10,000 for this expense, then your monthly savings would be:
$10,000 ÷ 12 months = $833 savings each month
Sinking fund calculator
Use this sinking fund calculator to figure out your monthly savings goals:
How many sinking funds should I have?
This will depend on how many saving goals you have. However, if you have too many, then you’ll be spreading your money too thin between them.
First consider how much you can budget in total to savings. Then, decide how you want to split this amount among your sinking funds.
If you only have an extra $100 to save every month, it doesn’t really make sense to set up 10 different sinking funds. It would take you forever to save up if you’re only depositing $10-$15 in each one!
Can I have too many sinking funds?
Yes – you can have too many sinking funds.
If your deposits to each are so small that it takes several months just to save up a few hundred dollars, then you should consider reducing the number of funds you have through elimination or consolidation.
Where do I find the money for my sinking funds?
Follow a budget and track your spending, so you can see where your money goes. Doing this for 30 to 60 days will reveal those budget leaks that are draining your ability to save. Once you know where you can cut expenses, you’ll free up more income for your sinking funds.
When should I start using a sinking fund?
The sooner you start saving with your sinking funds, the more time you’ll have to meet your savings goal. Saving a little bit over 12 months will be easier on a tight budget than having to save up $1000 in two months.
Start now, and start saving.
Why is it called a sinking fund?
The term “sinking fund” has been used since the 18th century, to describe a dedicated fund for paying down national debt. In essence, the monies in the fund were used to “sink” the debt until it was paid off.
Although the sinking fund meaning used today (for personal purposes) is for avoiding debt altogether, this term is still used to describe money set aside for a future purchase.
Should I have a sinking fund for retirement?
You could consider an account like a 401(k) or an IRA as a sinking fund for your retirement. These are much better options for retirement savings than a high-yield savings account.
What if there’s not enough in my sinking fund to cover an expense?
If you discover that there’s not enough in a sinking fund when the expense is due, no worries! Another benefit of having multiple sinking funds is that you can borrow from one to increase another.
Perhaps your insurance premium has gone up for the next year, and you’re $200 short in your sinking fund. You could borrow this amount from one or a few of the other funds, as long as those funds don’t need to be spent anytime soon. Just be sure you have a plan to replace what you’ve borrowed.
What do I do with a sinking fund after I’ve used the money?
You will have some sinking funds for one-time expenses, and others for ongoing or irregular expenses. For those that are only needed for a single purchase, you have a couple of options after the money is spent. You can choose to close the account permanently, or use it for a new sinking fund.
For expenses that are ongoing, you should replace the funds you’ve used until you reach the savings limit you’ve set.
How should I organize and keep track of my sinking funds?
You can organize your sinking funds by setting up separate savings accounts for each one. Another idea is to use cash envelopes to organize your savings. Make sure you give each a label that indicates what it’s for.
You can keep track of these accounts through popular apps like Mint or You Need A Budget. Once you connect your accounts to the app, you can see all of them in one place.
If you like to write things down, you can use a sinking funds tracker. Download the free sinking funds printable offered on this page, or do a Google search to find several sinking fund trackers to choose from. This is a great resource to track your savings toward each sinking fund expense.
Don’t forget to grab this FREE sinking funds tracker! Download today and start crushing your savings goals!
In summary: Sinking fund categories can help you save more
Once you set up a few sinking fund categories and start automating savings to each one, you’ll see how easy it can be to achieve your financial goals.
By setting aside a little bit of money each month for a few upcoming expenses, your financial life will become more organized and easier to manage.
If you want to have more control over your money, you must be intentional and take action. Follow the steps above to start your own sinking funds, grab the free sinking fund tracker printable, and start crushing your saving goals.
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