What are sinking funds? This post dives into a simple and effective method for putting more money in your savings account so you’re always prepared for upcoming expenses and can improve your financial picture!
It happens every year. We get to November and suddenly it’s time to start shopping for Christmas presents.
As fun as it is to pick out the perfect gifts for our loved ones, the holiday shopping season can also be a stressful one.
Our paycheck doesn’t automatically increase because we have the addition of presents to buy. So where do we get the extra money to pay for the gifts?
We could put it on a credit card, but that can accumulate fees and have us regretting our choices later.
Or we can start anticipating those holiday expenses months in advance and set up a sinking fund to pay for them, making Christmas a whole lot less stressful!
What is a sinking fund?
Sinking funds are money you set aside each month to pay for planned expenses in the future.
Using my example above, we could set up an automatic transfer of $100/month to a savings account for the holidays.
Then when Christmas comes around, we’ll already have a healthy sum of money saved for that exact purpose. We won’t have to worry about figuring out where all the extra money is going to come from.
List of Sinking Fund Categories
But the holidays aren’t the only reason we may want to set up a sinking fund. Here are some other common categories you could start saving in for future planned expenses:
- Gifts and/or special occasions
- Medical expenses
- Dental and/or orthodontic expenses
- Pet expenses
- Car repairs
- Home repairs
- New car downpayment
- New home downpayment
- Home decor and/or renovation projects
- Kids’ sports, activities, and camps
- Yearly membership fees
- Computers, TVs, phones, or other electronics
- Wedding expenses
- New baby expenses
Basically, any area in which you anticipate having to spend a chunk of money in the future can benefit from the creation of a sinking fund.
Is a sinking fund the same as a savings account?
You can store the money for your sinking fund in a savings account, but they are not the same thing.
A sinking fund is money you set aside each month with the intention of paying for a future expected expense. A savings account is the place where you store money you want to save.
They’re related, but not synonymous. Not every savings account is a sinking fund. And though many sinking funds are stored in a savings account, that is not the only option.
Is a sinking fund the same as an emergency fund?
Sinking funds and emergency funds are both methods of saving, but they are two separate things.
Sinking funds are directed toward expenses we expect to have:
- We know we are going to go on vacation this summer.
- We know our car will need new tires at some point in the not-too-distant future.
- And we know we’re going to have to pay for that summer camp that our kids attend every year.
An emergency fund, on the other hand, is reserved for unexpected expenses:
- We get laid off from work and need to cover our bills until our next job begins.
- We have a medical emergency and end up with a big hospital bill.
- Or a family member falls ill and we need to travel to be with them.
Though they serve different purposes, it can be very helpful to have both an emergency fund and sinking funds set up to help with larger expenses.
How to Set Up Sinking Funds to Save More Money
There are many different ways you could set up your sinking funds. We set up automatic transfers from our checking account to separate savings accounts for each sinking fund.
For us, automatic transfers have been crucial because they happen without us having to think about it.
We don’t have to debate about whether or not we have extra money to set aside this month. The money automatically leaves our checking and shows up in our savings, and then it is out of sight until we need it.
Where to Keep Sinking Funds
We chose to use an online bank for our sinking fund accounts for a few reasons.
First, they are more difficult to access. We can’t walk into a bank branch and access our money right away, so we are more intentional about using it.
Second, online banks typically have better savings rates since they don’t have the overhead of brick and mortar locations, so it allows us to accrue a little extra interest on the money we’re putting away.
Though we chose to have separate accounts for each of our sinking funds, you could get away with housing them all in a single savings account if you are really good at…
Tracking Your Sinking Funds
I think tracking is the most fun part of sinking funds! It’s a blast to watch those savings numbers grow and grow!
If you choose to house all of your sinking fund money in a single savings account, a sinking funds tracker will break down your amounts so you know exactly how much money you have saved for each fund.
Even though we have separate accounts for our sinking funds, I still use a sinking fund tracker spreadsheet to give me a clear picture of where we stand.
Entering our deposits into the tracker each month gives me a real sense of accomplishment. And I love seeing how much progress we’ve made toward our savings goals.
Sinking Funds Savings Accounts: Final Thoughts
Finances don’t have to be scary. In fact, they can be pretty exciting!
Sinking funds are a great way to save for the future, alleviating the burden that so often comes with larger purchases.
Because we can set them up to be automatic, they happen without much thought or effort from us. And then we have the extra cash available to us when we need it! Hooray!
Want to save this post to revisit later? Be sure to pin the image below so you can find it easily!
Thank you so much for following along! Have a wonderful day!
I am not a financial professional. The information in this post is for educational purposes only and is not considered personalized financial advice.