What is a sinking fund?
Put simply, a sinking fund is money set aside for a specific purpose. Having sinking funds keeps you from panicking when December rolls around and you realize you have about $3 to buy Christmas gifts for your whole family. (Anyone else? Just me? Moving on)
Starting up sinking funds takes just a little bit of thought up front, and will save you from having to rack up credit card debt when your car needs an unexpected major repair. Sinking funds = planning ahead and staying out of debt. You can read about how we’re paying off our six-figure debt here!
What kind of sinking funds should I have?
That depends on your lifestyle! Do you own a home? Do you own cars? Do you have kids?
Think about all of the irregular or yearly expenses you may have. The things that come up either out of nowhere (like needing a car repair) or the things that you may not think about saving for ahead of time (like Christmas). These are your sinking fund categories!
Sinking fund category examples:
- Home Maintenance
- Car registration/tabs
- Car maintenance
- Vacation fund
- “Not quite an Emergency” fund
How much should I plan to put in my sinking fund categories?
This is crucial: you need to be honest here. Don’t just decide on a number that “sounds good.”
If you always spend at least $100 on birthday gifts for each person, and you have 6 kids and a husband, $250 in your Birthday/Gifts sinking fund is NOT going to cover it. Be honest with yourself. Re-assessing your expenses may inspire you to cut them down, but be reasonable. Plan to save an appropriate amount of money.
You can be flexible with your sinking funds.
It’s your budget. It needs to work for you. Things may change, and that’s okay.
How to start your sinking funds
This will be very personal to you and your family’s finances. Start by looking at your budget. If you don’t have one, you need one! Check out my super easy tutorial on how to start a budget that works long term here.
Split up the amounts you need to save by the number of times you get paid in a year. This is how much you need to put aside from each paycheck for each sinking fund category! Super simple.
If you have any questions, let me know in the comments below!
Be sure to pin this image for later!