What is a Sinking Fund?
A sinking fund is a way to save money for a specific purpose (usually an annual expense), by setting aside a certain amount of money each month. The purpose of a sinking fund is to avoid having to come up with large amounts of money for an expense that you can expect every year, e.g. Christmas gifts, a vacation trip or bills you pay annually.
When it comes to budgeting & finances, I’ve learned that the more you can plan ahead, the better your budgeting experience will be. I’ve found that sinking funds help keep the numbers in my monthly budget fairly consistent, and they also take away any anxiety I have about these large upcoming expenses.
Where do I keep my Sinking Funds?
Some people like to keep cash at home for their sinking funds. Aside from my monthly cash envelopes, I don’t like keeping cash with me, or at home, so I use separate online savings accounts instead.
Now onto the 5 sinking funds I started this year:
Christmas Fund ($55/month)
I failed to do this last year which made my holiday shopping a bit stressful. The good thing is we had just completed Baby Step 3 and had some extra cash in December which I ended up using for gifts. This year I’m budgeting $600 for Christmas which is about what we end up spending every year. This means I’ll be putting away $55/month for this category.
Home Repair/Replacement Fund ($12.50/month)
Although we currently rent, I still like the idea of having a “Home” fund in case any appliances need to be replaced or the washer/dryer needs to be repaired. Because it is not our responsibility to pay for any repairs or maintenance to our apartment, our home repair fund is not that large. I try to keep this sinking fund at about $150 which makes the monthly contribution to this fund pretty minimal.
Vehicle Repair Fund ($34/month)
The vehicle repair/maintenance fund is what we use to pay for oil changes, new tires or miscellaneous repairs. There will always be some type of maintenance or car repair needed so we try and keep our vehicle repair fund at $400.
Travel Fund ($75/month)
Now that we have completed Baby Step 2 & 3, we are planning a trip in the next few months. We don’t intend on spending a ton of money while we’re there and have already bought the round-trip tickets so we’re planning on allocating $300 for the trip.
Life Insurance Bill ($43/month)
Last year we signed up for life insurance which came out to $256/ year for each of us. The annual bill is coming up next month so it’s a little too late to start a sinking fund for this year’s payment but as soon as it gets paid we will be starting a fund for next year’s bill.