Sinking Funds
What Is a Sinking Fund?
A sinking fund is a justification fund containing money set aside or saved to pay off a liability or large expense. You can have several savings funds with limited or unlimited amounts. The amount of sinking funds is up to you. I suggest starting small with 2 to 5 funds for the first few months. Working your way up to 20 or more is up to you, your needs and wants. BUT do not get overwhelmed with the process it takes time to master and starting small can help you in the long run. You can create a sinking fund for any financial goal, dream or expense you need.
The crucial part to any sinking fund is savings. Before starting any sinking fund, you should always start with a budget. This will allow you to find how much a paycheck or monthly you can contribute to the fund(s). Allocating money to fund(s) is up to you, your budget, bare minimum and date achieved.
Here’s How Sinking Funds Work
Every month, you’ll save a specified amount of money for a particular purpose to use at a later date. Doing this will allow you to save up small amounts over time, instead of having to come up with a big chunk of money all at once.
Why Sinking funds?
Sinking funds can help ease the financial burden by saving up for small emergency funds instead of using your paycheck which is already budgeted for monthly expenses putting your further into debt or behind in bills.
This benefit also lowers the help for credit cards or bank loans, which can be quite costly with interest rates and loan fees. It also is rewarding once you know you have the money saved and don’t have to stress where will the money come from.
Examples of Sinking Funds
- Health care
- New Furniture
- Holidays (not Christmas)
- New tires
- Car repairs or maintenance
- Christmas gifts/activities
- Vet bills
- Wedding expenses
- Graduations
- Birthdays
- School clothes and supplies
- Clothes for a special occasion or new wardrobe
- Vacation
- Home repair
- Home remodel
- Concert tickets
- Miscellaneous
- Fun money
- Much more and can be personal!
Difference between emergency fund and sinking funds
An emergency fund is also different from a sinking fund. Very different.
An emergency fund is for unexpected expenses only! Side note: I follow Dave Ramsey so while in debt and paying it off your first emergency fund is to save $1000 then once its all paid off, Dave Ramsey suggests 3-6 months of your monthly expenses.
Before you even think about touching that emergency fund think if these three questions:
- Is it unexpected?
- Is it extremely necessary?
- Is it vital?
Examples of uses for an emergency fund:
Tow truck services, broken finger, repair the furnace in the middle of winter, or eyeglasses broke (only pair).
A sinking fund is for those expenses you know are forthcoming and can be planned ahead.
Examples of uses for sinking funds:
Disney World trip, school supplies, Christmas and car tags.
All in all, an emergency fund is for the unknown, and a sinking fund is for the known.
My first sinking fund categories:
- Medical $200
- Car maintenance $200
- Christmas $1500
- Walt Disney World $7000
- Fun Money $200
- Debt (No$ cap)
- Car tags $400
How I started and saved money
You can have some fun with this step and still not spend a dime. I first started using blank paper envelopes. That’s it! I labeled what they were (listed above) and their goal amount. Every paycheck, bonus or things that I sold I added money to those envelopes. I never took out the money for other things only for that particular goal. Once I got them filled, I moved to another sinking fund. If I used that money, I would restart that sinking fund till it got to the cap, if there was one assigned.
Once I got some money saved, I started to make my own envelopes. I used my scrapbook paper and made my sinking fund envelopes with a Disney theme. I love Disney! I used packing tape and cut out my envelopes to make them look adorable and the best part, it was so cheap! Once I wore those out, and wanted to take it a setup further I purchased a binder and plastic envelopes. I saved up some money and used that for my amazon purchases. Remember you are trying to save money and get out of debt. Don’t go buy new and pretty binders and envelopes when you first start out. You must learn how to make this work first and the name of the game is to savenot spend! Do this slowly, it is not worth it if you start out buying $20 to $60 in sinking funding supplies when you won’t use them and give up on this process.