If you’re tired of feeling like you never have money for the things you want to do in life, then say hello to your new budget hack: sinking funds!
Sinking funds allow you to effectively plan for future expenses by getting super clear on your goals. Think of them as designated buckets of money you set aside for very specific future expected and planned expenses. Those are the key words here: expected and planned.
Unlike an emergency fund, designed to hold 3-6 months of unexpected expenses, sinking funds are tailored to cover anticipated costs like vacations, home repairs, car maintenance, or even holiday shopping. Specific examples of future expected and planned expenses you may know of ahead of time:
You're taking that big European vacation later this year with your family
You’re buying a new roof before the winter
You’re going to need new tires for your car in 4-5 months
You go all out at Christmas and get lots of presents for your friends and family
Notice how these are all things that we're planning for and that we know are going to happen. By proactively saving little bits at a time for these expenses, you can avoid the stress of scrambling for cash when the time comes.
Why are Sinking Funds Important?
Now, you might be wondering, "Why do I need a sinking fund when I already have a regular savings account?" That's a great question, so let’s break it down: While having a traditional savings account is a great start, it can be really difficult to save money for things when all your dollars are lumped together.
A sinking fund serves a more targeted, intentional purpose. It allows you to allocate funds for specific expenses without dipping into your emergency fund or relying on credit cards.
Now, to circle back to the example of the new roof…if a hail storm hits your town and your roof caves in, that would be an emergency, and you would utilize your emergency fund since it is unexpected. You probably didn’t summon the hail storm gods to pop off like that. You didn’t plan or expect a hail storm.
However, if you know that you need a new roof next year, that's something you want to plan for ahead of time since it’s an expected expense that’s pretty pricey. We don't want to dip into our emergency fund for an expense we are expecting.
How Do Sinking Funds Work?
Suppose you have a sinking fund for car maintenance. Each month, you set aside a predetermined amount of money specifically marked for future car repairs, such as oil changes, tire replacements, or unexpected breakdowns. By consistently contributing to your sinking fund over time, you build up a financial cushion that helps cover these expenses when they inevitably arise (because even though we might not know the exact date of that oil change right now, we know it’s going to happen).
Now you are going to do this for all the things coming up within the next year or so.
Creating Your Sinking Fund Categories
Now that you understand the concept of sinking funds let's talk about how to create your own sinking fund categories. The key is to identify your upcoming expenses and prioritize them based on their urgency and importance to you. This is where our goals come into play!
Start by making a list of recurring, anticipated, and dream expenses throughout the year. Include things like property taxes, home renovations, and your annual car insurance bill, but also fun things like vacations, concerts, quarterly botox appointments, and holiday gifts.
Then, estimate the total cost of each expense and divide it by the number of months until it's due. That’s how much you should contribute each month so you have the cash when the time comes.
Doing this exercise will allow you to determine how much you need to save each month —and if it’s realistic for you to achieve. If it comes out to be too much each month, this is where you get to decide what’s most important to you. Maybe you’ve been dying for that tattoo for two whole years, so this is the year you skip buying Christmas gifts, and everyone gets a nice hug and a high five instead😎
You work hard for your money and deserve to put yourself first every once in a while!
How to Use Sinking Funds to Save More Money
Here are some tips to help you maximize the effectiveness of your sinking funds — aka save more money faster:
Open a High-Yield Savings Account
Remember when I said it’s really hard to save money when all your cash is lumped together? This is where a HYSA is going to become your new best friend.
You’re going to open this at a different bank, so your cash isn’t staring you in the face every time you log in to your bank account. I personally love and use both Ally and Marcus by Goldman Sachs.
Automate Your Contributions
Set up automatic transfers from your checking account to your new sinking fund accounts to ensure consistent and hassle-free savings. Another option is to set it up so it just automatically comes out of your paycheck, and you never even get to see it in your checking account.
Do not trust yourself just to remember to save this money. Based on personal experience, I can confidently tell you that thinking you will remember to do this each payday is not an effective strategy. 🫠 Automation is key.
Adjust Your Goals as Needed
Life happens, and financial priorities may will change over time. Be flexible and patient with yourself. Adjusting your sinking fund contributions as necessary to reflect your evolving needs and goals is okay.
These should feel empowering because you get to decide what’s most important.
Keep Your Savings Organized
You can keep track of your sinking funds using a spreadsheet or budgeting app, but my most favorite method is dedicated savings accounts in a HYSA. This will help you stay organized and monitor your progress toward each savings goal.
Another reason I love HYSAs is the ability to easily differentiate where your dollars are allocated and name your savings after each goal. Ally is awesome because it has a neat little bucket feature to separate your different goals and show your progress.
Celebrate Milestones
Let’s be honest: spending money is way easier than saving money, so don’t forget to celebrate your progress along the way! Whether you reach a savings milestone or successfully cover an expense with your sinking fund, take a moment to pat yourself on the back and acknowledge your financial wins.
Cheer yourself in the same way you’d cheer on your best friend.
Prepare for the Future
Money is mental and it’s doing small things like this that will help prepare us for the future. We spend so much time working for our money that it’s important we spend a few minutes deciding how we’d like to spend it — after all, there is no worse feeling than getting to the end of the month and wondering where the heck all our money went.
I promise you that the first time you achieve one of your savings goals and realize how stress-free that moment is compared to past events, you will never look back!
Wrapping Up
Remember, sinking funds are very different than an emergency fund. They are designed to stash money away for those fun things we want, and deserve, to do in life (as well as the not-so-fun things we know we’ll need…like getting that weird clicking noise our car has been making that we’ve been avoiding finally checked out.)
We want to plan for our sinking funds by setting aside money now. We don't want to go dipping into our emergency fund savings for something like that girls trip to Mexico. Start planning, start saving, and feel financial peace when the time comes for that future expected expense. You’ve got this!
