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The sinking funds every couple should have.
You probably just heard about sinking funds and was wondering what sinking funds example that you can include in your budget are.
But before we get to the examples, let’s first get into the nitty-gritty of a sinking fund so that you will have a better understanding.
SINKING FUND METHOD
If you are looking for a more technical definition of the sinking fund method, you can check it out here.
If you’d rather have me define it in a friends-chatting-over-coffee way, read on.
The sinking fund method is merely setting aside a certain amount of money every month for a certain period until you’ll come up with the large amount you need to take care of a bill or a big purchase at that time.
Did I just confuse you more? I thought so.
Let’s try again. The sinking fund method is the method of saving a smaller amount of money each month to cover a one-time big financial expense or an irregular predetermined expense.
For example, let’s say you have a home insurance bill worth $1,200 that you pay every January.
That ‘s a lot of money coming out of your January budget. You might even have to tap into your emergency fund or your savings.
Enter sinking funds.
If you use the sinking method, you will set aside $100 every month starting January until December.
By the end of December, you would then have the full amount of $1,200 that you need to pay your home insurance in January. Then you would start all over again.
Better? Not yet?
Ok, here is another example. Let’s say you and your husband will go on a vacation 10 months from now.
After doing the planning, you projected that you will need $2,000 for pocket money. According to the sinking fund method, you would need to set aside $200 every month for 10 months.
Consequently, when your vacation time comes, your pocket money is ready.
Now you get the idea.
SINKING FUND GOALS AND BENEFITS
Having a sinking has its benefit, which includes:
- Help You Afford What You Want
- Keep You Out Of Debt
- Keep You On Budget
- Save You From Using Your Emergency Fund
- Give You A Peace Of Mind
- Help You Achieve Your Financial Goals
SINKING FUNDS EXAMPLE
HOME REPAIR FUND
Not every home is perfect. Something in the house will always break and will need repair. It can be the plumbing, furnace, roof, driveway, and more. You can use this fund to cover those types of expenses.
NEW APPLIANCE FUND
Nothing lasts forever, too, so if you know that one of your appliances is on its last legs, you might want to start saving for a replacement.
FURNITURE SINKING FUND
Furniture can be expensive. Your furniture sinking fund can cover the purchase of your new furniture.
CAR REPLACEMENT FUND
I drive an old Nissan Sentra with almost 200K miles on it. I know that it will give up on me soon. However, we already have a sinking fund that can go towards a replacement when that happens.
CAR MAINTENANCE FUND
Oil change, new tires, car registration, and more are some of the expenses needed to maintain your car. The car maintenance fund can help you cover those expenses.
You need money for fun too. Road trips, cruises, anniversary trips, birthday trips, or holiday trips can wreak havoc to your budget. But when you have a travel sinking fund, you’re covered.
PROPERTY TAX FUND
If you have an escrow, you might not need this because your escrow will take care of it.
But if you can remove your escrow, do it. Don’t let the bank keep the interest earned by your money.
I recently removed ours, and I’m so happy I did.
If you decide to pay your property tax yourself, be diligent in setting aside money for that purpose.
CAR INSURANCE FUND
I used to pay our car insurance every month, but I found out that I can save more if I do a six-month plan.
HOME INSURANCE FUND
We pay our home insurance every year, and it’s not cheap. It used to be with our escrow too, but now, I am paying it myself. I get to keep the interest earned in a year.
I don’t know about you, but where we live, our utilities fluctuate due to the change in season. Winter season spikes up the heating bill while during the summer season makes the AC work really hard.
Therefore it helps to have the utility sinking fund to offset the difference.
This baby sinking fund will help you if you are currently pregnant. It will cover everything that the baby needs upon birth.
This fund will cover anything beyond your copays because let’s face it, not everything will be covered by your insurance.
When you are trying to conceive, you can start setting aside a fund for ovulation kits, pregnancy kits, supplements, etc. If you are struggling with infertility. Use the money for fertility treatment.
LIFE INSURANCE PREMIUM FUND
If you pay your premium monthly, then you might not need this fund. However, if you have the option for an annual payment and you can save money, then go for it.
CHRISTMAS OR HOLIDAY FUND
Most people tend to blow off their budget during the holidays because they didn’t prepare for it. If you are one of them, starting a holiday fund now will help you during this year’s holiday season.
I’m sure you have loved ones that you want to buy a gift for every year. Birthdays, weddings, anniversaries, and the list goes on.
It can quickly add up that you don’t even want to know how much you spent for the whole year. Having a gift fund will help protect your budget.
CONTINUING EDUCATION FUND
I work in the healthcare field, and I need to complete a certain amount of continuing education units to be able to renew my license.
PET CARE FUND
Pets are like babies. They have expenses too. Food, vet, insurance, grooming, outfits, and more.
We started one for our fur baby, and I can’t even tell you how many times the pet sinking fund saved our budget.
MEMBERSHIP RENEWAL FUND
Gym membership and other subscriptions that you have can get really expensive once they’re due. Setting aside money for it every month will make it doable.
IRS SINKING FUND
We just started doing this when we were caught off guard in 2019. We owed the IRS money, and it was a lot of money.
Since then, although we reevaluated and reworked our tax plan, we still keep a fund for IRS payment just in case.
HOW DO YOU MAKE A SINKING FUND?
1) List the sinking fund categories that you need.
Ex. Car insurance
2) Identify how much you need for each sinking fund.
Ex. Car insurance $600
3) Indicate the number of months until you need the money for each fund.
Ex. Car insurance $600 6 months
4) Establish your monthly payment by dividing the amount you need with the number of months until you need it.
Ex. Car insurance $600 6 months $50/mo
5) Update your monthly budget to include a category for each of the sinking fund expenses.
Ex. Sinking Fund For Car Insurance $50
HOW TO ORGANIZE SINKING FUNDS
By having an efficient way to organize your sinking funds, you’ll most likely make sinking funds work for you. Besides, the idea of having sinking funds is to make your life easier, not more stressful.
You can use cash envelopes to organize your sinking funds. Every paycheck, you simply withdraw the amount of money you need for each of the sinking funds that you have.
Put them on the designated envelope and keep them in a safe place. If you are a pen and paper gal, you can use this sinking fund worksheet to track your sinking funds every month.
USE ONE SEPARATE ACCOUNT
If you do not want piles of money lying around, you can open a separate account for all your sinking funds.
You can use the same sinking fund worksheet to track how much you have in each sinking fund.
You can set up an auto-deposit so that you do not have to transfer the money every paycheck manually.
USE BANKS THAT ALLOW YOU TO OPEN MULTIPLE ACCOUNTS
You can also utilize banks that allow multiple accounts and set your sinking fund monthly payments in autopilot.
We have quite a list of sinking funds, and we personally use Capital One 360. Capital One 360 allows up to 25 savings account, and they make it easy to transfer money to and from your main bank account.
I set it on autopilot, so every paycheck, I have a set amount debited from our main account to go to each of the sinking funds.
This is absolutely my favorite because it makes everything effortless.
INCLUDE THEM ON YOUR BUDGET
Whichever way you use to organize your sinking fund, you still need to make it a point to include these sinking funds payment on your monthly budget.
There you have it!
Having sinking funds can help you in a lot of ways, from keeping you out of debt to helping you afford what you want. Also, starting a sinking fund is really easy, and maintaining it is not hard either.
If you haven’t started yet, review the sinking funds example above and start one now.
Sinking Fund Related Articles:
- Emergency Fund Vs Sinking Fund
- How To Start An Emergency Fund(Even if you’re broke)
- How To Start A Monthly Budget
- How To Rebuild Credit Score
- How To Meal Plan On A Budget
Great guide to sinking funds! I have money spread across several different savings and investment accounts but the savings part isn’t really earmarked for anything — I just pull money out of it as needed. What’s the best way to keep track of multiple funds like this?
Hi Rebecca, I use Capital One for our sinking funds, it allows you to open up to 25 sub savings account in one account. I then name each account with our corresponding sinking fund categories. I just started it last year and so far I’m loving it. I get to see how much I have on each fund. Check it out, I’m sure you’ll love it 🙂
This is exactly what I do, I love it. I have a separate checking account and transfer money every time I get paid. I have a wedding fund (daughter getting married), a tax fund and a travel fund. When things come up I just add another account. I have a spreadsheet to keep track of the money. I love this idea and glad you shared this as I’ve never read this before.
That’s awesome! It does really help organize finances. Thanks for reading 🙂