A sinking fund is a budget category or savings strategy used to cover a planned and expected, but irregular and non-monthly, expense.
Unlike an emergency fund where you don’t know when, how much, or if you’ll need the money, a sinking fund is a savings plan for expenses you’ll have within the next year. Some sinking fund examples include:
- Bills you only pay once a year (like annual insurance)
- Regular maintenance or replacement costs (like new tires or necessary computer upgrades)
- Major life events (like purchasing a new car)
- Semi-regular celebrations (like family vacations or holidays)
How can I use a sinking fund?
Use the prompts (marked by the 📝 symbol) to see how to start using a sinking fund to help manage your finances.
First, pick an expense you know you’ll incur soon that is not a part of your monthly budget. Again, it can be an annual bill, an anticipated repair, or even preparation for holiday gift shopping!
📝 For what am I saving? ______________________________________.
Next, determine the cost and timeline. If you have a record of what you paid for this item or event in the past (like your bank statements or previous budgets), use that to estimate your future cost and when you will need to pay it. You might even already have an invoice if it is a recurring annual expense, so you’ll have the exact amount and due date.
📝 How much will this cost? $__________________.
📝 When will I need to pay for this? ______________________.
Use this information to make a simple savings plan. If you want to set aside money each month, divide the total cost by the months until you have to pay it. You can do this same thing for different time frames if you prefer, such as weekly or biweekly, to match your pay period.
📝 I need to save $_____________ for _______________________ to cover this expense.
(Need help? Check out our “How to Save $500 in a Year” blog for a savings plan example!)
Be sure to identify where you will keep your savings in your plan. Some ways to track your savings are to:
- Keep all your savings together. Add your funds to your existing checking or savings account and record the different purposes for the funds in a journal, spreadsheet, or budgeting app.
- Separate your sinking funds. Open a new savings account (you might be able to do that at the same financial institution) for each sinking fund you plan to use.
- If you primarily use cash, sort your money into separate boxes or jars.
📝I will keep these savings in __________________________________.
Follow through with your plan until the due date arrives, then go ahead and spend that money. You might feel hesitant or disheartened to spend all your savings at once, but remember that was the point! A sinking fund is there for you to use at the right time for the right reason. Spending that money is a cause of celebration – not panic – because it shows that you were able to take control of your finances as best you could and, as a result, covered your expenses on your terms to meet your goals.
Money Management E-Newsletter: September 2020