Create Your Sinking Fund in 4 Easy Steps
First of all, what is a sinking fund?
A sinking fund is a smart and easy way to set aside money over time for future expenses or to repay debt. Unlike an emergency fund, which is for those surprise expenses, a sinking fund is for those planned and expected costs that pop up once or a few times a year. Sometimes, these bills can be quite high, so it's important to include them in your monthly budget.
Why is a Sinking Fund Important
Regularly adding to a sinking fund means you'll have the money ready when you need it, sparing you the stress of last-minute fund hunting. Because let's face it, it is easier to forget to set money aside for those annual fees than for those monthly bills.
With a sinking fund, you can also handle big expenses without needing to go into debt, ultimately saving you from interest payments and other financial hurdles.
Ultimately, a sinking fund will hep you spread out large expenses into easy, manageable monthly or weekly contributions, making budgeting much more manageable, and less stressful.
How to Incorporate a Sinking Fund into Your Budget
Adding a sinking fund to your budget can truly transform your financial well-being. I've compiled for you 4 simple steps that can help you build your own sinking fund, tailored to your financial needs, and additional steps to make things easier on you.
1. Identify Your Sinking Fund Categories
First, think about the specific expenses you want to save for. This is by far the hardest step to take. These expenses can be based on your personal needs and financial goals. To track down your recurring annual bills, you can look through your old bank statements or the invoices you kept from the last 12 months. I know, I know, this can seem like a daunting task, but once it is done, you will have a clear picture of your recurring bills (and this will probably help you not forget any!). You can also use your sinking fund to plan ahead future expenses you might want to save for.
Here are some common categories to consider:
Home Repairs
Car Maintenance
Vacation
Medical Expenses
Holiday Gifts
Insurance
Taxes
Pet Care
Big Purchases
Special Events
2. Calculate the Total Cost
Once you have your categories, estimate the total cost for each. For example, if you know you’ll need $1,200 for car maintenance over the next year, that’s your target amount for that category. I created a separate table in my Notion Budget & Expenses Tracker specifically for annual expenses, which helps me know the total amount I’ll be working with.
*Pro tip: it's better to estimate higher so there are no bad surprises.
3. Set a Timeline and Break It Down into Monthly Contributions
Determine when you will need the funds. This will help you calculate how much you need to save each month. For example, if you need $1,200 for car maintenance in a year, you’ll need to save $100 per month.
Divide the total cost by the number of months you have until the expense is due. This will give you a manageable monthly savings goal. If you're starting now but need money sooner for a particular expense, you can adjust the funds accordingly. The most important thing is to be realistic with the timeline you're working with for each individual expense when starting out.
4. Integrate into Your Budget
Add these monthly contributions to your budget. Treat them as non-negotiable expenses, just like rent or utilities. This ensures you consistently set aside money for your sinking fund.
Additional Steps to Take
Open Separate Accounts
To avoid mixing your sinking fund money with your regular spending money, consider opening separate savings accounts for your sinking fund. You can even consider doing it for big categories, as many banks allow you to open multiple savings accounts without fees.
Automate Your Savings
Setting up automatic transfers from your checking account to your sinking fund accounts can be an extra step to take. This way, you won’t forget to make the transfers from one to another, and it becomes a regular part of your financial routine without even having to think about it.
Monitor and Adjust
Regularly review your sinking funds to ensure you’re on track, and you're not forgetting anything. If your expenses or timeline change, adjust your contributions accordingly.
All in all…
Incorporating a sinking fund into your budget takes a bit of planning and discipline, but the benefits are well worth it. You’ll be financially prepared for large, anticipated expenses, avoid going into debt, and maintain better control over your finances. Start today by identifying your sinking fund categories and setting aside a small amount each month. Your future self will thank you!
