What Are Sinking Funds And How Can They Help You Create A Better Budget?

When I first embarked upon the daunting task of getting our finances straightened out, the main advice I was hit with immediately was that we needed a personal budget. Although I didn’t know how to create a budget, I followed the loudest talking heads’ basic advice, used some templates, and set up budget categories and amounts. 

I gave myself a ton of grace, luckily, because I knew we would have to tweak numbers and that it would take a few months to get through this learning curve. However, months later, we were still trying and failing miserably. No matter what, the budget got busted every dang month by some unforeseen expense. 

Something was missing, maybe I was doing it wrong, or maybe there was something wrong with me. Yeah, I was there.

Whether it was annual insurance premiums, the Amazon Prime membership fee, a vet visit for a sick pet, or even an onslaught of birthday party invitations, something was throwing a wrench in my well-intentioned budget every single month. I was left feeling defeated, at fault, and broken.

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I grew tired of these plan saboteurs quickly and decided to pull last year’s spending to help me predict this years’ upcoming “Unexpected” expenses. I started to become detective-like about looking backward so I could think ahead and actually budget for things instead of being surprised by them. 

My crude, yet progressive solution back then was to add up all the expenses over the course of the prior year that didn’t “fit” into any of my existing budget categories. From there, I could decide whether to add a budget category or keep the expense in this extra pot to the side. 

As it turns out, the total of these extras for the year was in the thousands! With my eyes opened wide, I vowed to reduce the frivolous extras. And to cover the necessary yet unexpected items, I took the total and divided it by 12. This gave me an amount I could put aside each month so that when a surprise expense came up, I was ready with cash. 

Are you 100% aware of what you owe to whom, which bank or card has what amount in it, when your due dates are, how much you contribute to each savings and retirement account, and how much each bill usually is? 

Don’t worry. Most people don’t. This is why I created the Financial Awareness & Budgeting workbook for you to download for FREE below. The very first step toward launching your financial freedom journey is to create an absolute awareness of your numbers. This simple workbook walks you through the exact process I use with private financial coaching clients and comes with links/instructions to follow so you get the best experience possible. 

Start Here: 

I didn’t know it back then, but what I did was set up one sizeable sinking fund. In time, I learned that it was called a sinking fund (haha 🙂 and discovered that this type of savings account – one used to remove the shock factor from surprise expenses and render them unknown yet expected, comes with some profound benefits – mentally and financially!

How To Use Sinking Funds

Sinking funds are mini savings accounts that cover irregular, annual, or unpredictable yet necessary expenses. This is very different from and separate from an emergency fund. (More on emergency funds here.)

You create each sinking fund (Yes! You’ll have several!) for a specific, targeted expense that you know you will have, although you might not even know when. Christmas and Birthdays are easy – they come on the same date every year. But the a/c going out or car maintenance might be a little harder to plan for. These are all expenses you know are coming but that aren’t in your regular monthly budget, which is why when they come up, they’re usually budget-busters. 

When you set aside $20-$50 each month toward these eventual bills, you remove the surprise-effect of the expense and can pay for the thing or event in cash, without a headache, and you don’t have to feel trapped into a decision or go into debt. Amazing, right?

I use You Need A Budget, referred to often as YNAB, to budget all my regular monthly spending, savings, retirement contributions, and yes, even sinking funds every month. YNAB is the only budgeting app I’ve seen that shows you your remaining balance to be budgeted as you allocate money toward your expected expenses for the month.

Before YNAB, I thought I was budgeting because I used the budgeting feature on some other popular apps. But what was really happening was I’d spend based on the theoretical budget category amount, even if some of that money really needed to go toward paying off debt. YNAB is different than every other budgeting software out there for this reason, and I highly recommend it! Snag your 30 Day Free Trial below.  

Budgets are a custom deal because each of us is unique and has unique lifestyles, wants, and needs. Well, your sinking funds are the same way. We may have some in common, but only you’ll know what sinking funds you need. If there’s a particular thing you tend to binge on, consider setting up a sinking fund for that, along with the responsible categories like taxes, back-to-school costs, and memberships. 

This type of approach is advantageous if you’ve recognized a spending habit you lean on to blow off steam or make you feel better. Think about how you might go binge-shopping after a rough day or veg out on fast food to soothe hurt feelings. Look at this not as supporting or encouraging the behavior, but as being prepared for when the behavior inevitably comes up. 

It’s better to have budgeted for something, regardless of whether it’s a good or bad habit so that when you’re at your weakest, you can focus solely on the behavior and it’s not layered with guilt about spending money. The money was there, ready for this occurrence and at least it won’t wreck the rest of your budget. 

Once you decide what you need sinking funds for, each of those fund names become a line item in your budget with the amount that you’ll contribute toward that sinking fund next to it. 

The Benefits Of Using Sinking Funds In Your Budget

Don’t get caught off guard by the negative connotation you might derive from the word   sinking. 

Consider this. What if you were hired to build a ship that would sink? You’d be really successful at that job, right? You wouldn’t have to do all these crazy calculations to find the most buoyant materials and ensure there were no holes in the ship because it’s  meant  to sink! 

Well, it’s the same thing with these little mini-savings buckets; they’re  meant  to be spent!

This budgeting/saving strategy is named this way because each month, you’re putting a little cash toward these expected unknowns as if the money is already spent. You’re mentally and physically setting yourself up to spend that money comfortably when the need arises.

Sinking funds are an excellent tool to use as a part of your money management toolbox. By setting aside money for things you know you’re going to spend money on (although you don’t know when), you make those expenses part of your regular monthly budget. 

You build up the fund for the kids’ back-to-school expenses, for example, and when July/August comes around, you get stress-free (at least budget-wise) back-to-school shopping. 

This strategy takes the “surprise” out of unexpected bills because by planning ahead, you’re making them part of your expected expenses. By removing that potential shock factor, you will feel more in control of your money. You won’t feel pressured into buying the cheapest fix during a stressful moment, and you won’t have to whip out the credit card and wonder how you’ll pay for it. You’ll be even less tempted to ever dip into your emergency fund to cover something that’s not an actual emergency. 

Think about the tires on the car. This is an excellent example because we all know that the tread wears down and that eventually, you’ll have to pay like $600 for 4 new tires, but rarely do people plan for this. Let’s pretend you did, though, because you read this article and implemented sinking funds into your budget. 🙂

Bam! You have a blowout. Not only did that get your heart racing, but the experience of calling into work, getting the car towed, and now facing a fat bill for four new tires is enough to just completely stress you out! 

Although this whole situation stinks, imagine how calmly you can handle it, knowing that you have hundreds already set aside for tires. Imagine yourself level-headedly picking the tires that sound best for your car instead of feeling backed into a corner and defaulting to the cheapest option out of fear. Feel the headache-less, argument-free, non-debt-inducing transaction occurring and you driving away from the tire shop with 4 beautiful black tires on your ride with your mommy’s-alone-in-the-car music blaring. 

*Deep breath* Isn’t that beautiful?

How To Get Started Using Sinking Funds

Remember earlier in this article, where I shared my frustration at the budget-saboteurs and began to pull last years’ spending to help me figure out what to plan for this year? 

Well, to get started using sinking funds, you need to go through a similar exercise. You don’t have to pull last years’ spending, though. All you need to do is whip out your calendar, and month by month, think about typical events that occur where you would want to or feel obligated to spend money. 

I’m a pen & paper kinda gal, so I’d literally sit on the floor with a paper calendar and a notepad, writing down the month and expense as I went. This is a great time to add events, people’s birthdays, and reminders of upcoming events to your calendar too! 

Think about your family members’ needs, your pets, vehicle maintenance needs, and potential home repairs too. Add those things to your list. Now, don’t freak out if you have a list of 20 items at this point! You’re not going to open 20 savings accounts (haha).

Go down the list and assign a dollar value to each event or expense you came up with. Certain items are low-cost, I’d say less than $50 in one month, and can be covered by intentional budgeting. But other things can be hundreds or even thousands of dollars OR if several of these “surprises” occur in one month that can really add up too!

Pick the top 3-5 largest expenses OR if several items hit in any single month and add up to become a considerable expense, include that month as one of those top categories. These 3-5 big budget-busters become your targeted sinking funds. 

In deciding how much to put into each of these sinking funds each month, take the expected cost per sinking fund, and divide it by 12. Now you’ll have an equal amount each month to set aside for that expense. 

If any expenses are more pressing, take the amount of the expected bill and divide it by the number of months between now and when you’ll have to pay for the item. For example, if it’s January and you want $500 for back-to-school expenses saved up by July, you have February, March, April, May, and June to make savings deposits. Calculate $500 / 5 and see that you’ll need to set aside $100 per month beginning in February to reach your sinking fund goal. 

Once you have the category names and the math worked out, put your plan in place by inserting these sinking fund names as line items in your regular monthly budget. This is also a great time to add any of those other smaller expenses you discovered to the budget as well; even if you just label it “Extras” and try to throw $100 at it, that’s better than having no plan at all. 

Last but not least, open a savings account for each sinking fund category. Whether with your primary banking institution or not, just look for an online account with no minimum balance requirements and no fees. I personally love Ally bank because, in addition to the features above, you can set up “buckets” for categories within your savings accounts. 

Sinking Fund Categories & Examples

Suppose you need a little help coming up with sinking funds categories or deciding what expenses you should use sinking funds for, never fear! Here’s a list of potential sinking fund examples. Pin this to your Pinterest account so you can refer back to it easily.

Remember what I said earlier: Your life and your needs are unique. So, if you know of an expense that you might need to make a sinking fund for, do it! This list of potential categories for sinking funds is just to get your wheels turning. Some items that are super important for me to save for may not be a priority for you, and that’s okay!

My must-have sinking fund categories right now are birthdays, Christmas, life & auto insurance premiums, home repairs, and vehicle maintenance. I’ve added and removed categories over the years as our children have grown and our needs changed. Give yourself the grace to revamp, recalculate, delete, or add sinking funds throughout your financial journey too.

In summary, sinking funds are simply mini-savings accounts where you allocate a small amount of money each month so that irregular or unpredictable expenses that will inevitably arise are covered without having to use credit or dip into your emergency fund. 

If you get stuck, are unsure about how to do this, or can’t do this on your own, I encourage you to reach out for help. A quick DM or phone call might be all it takes to get you back on track and gaining confidence in your money management skills. 

Personal finances are not just numbers and math. Our financial choices and money management skills rely on our emotions, experiences, and below-the-surface beliefs about ourselves and money. All financial journeys pair with self-discovery and personal growth, which is why I’m here to guide you, either in a group program or with private coaching.  

You are not alone. I believe in you, mama.