Sinking funds demystified: they are just small, easily accessible savings accounts to add money to monthly for expenses that aren’t monthly.
It’s one of the more tedious aspects of budgeting and cash flow management to administer, but if you get it right you’ll be in much better financial shape. You’ll avoid dipping into your hard-earned emergency fund or getting into credit card debt. Emergency funds should be for unexpected expenses only. In this guide, I’ll walk you through how to set up and manage sinking funds effectively.
What Sinking Funds Do I Use?
My sinking funds will be different from yours. Everyone’s sinking funds will change over time as their lives evolve. Remember to re-evaluate periodically. I currently have 20 – yes 20, sinking funds. You may choose to broaden your categories, and that’s okay! I find it easier to manage the timing aspect of each individually.
Christmas Gifts – For the whole fam, daycare teachers, friends
Car taxes – Mine & hubby’s
Vet Savings – Yearly wellness appointments, vaccines, sick visits
Hair – Highlights & haircut
Car repair – Oil changes, tires, repairs
Dog Meds – Flea & tick, seizure med
Med Aesthetics – classified
Easter – Kids’ baskets, family brunch at our house
Yearly Subscriptions – Disney +, BJs, HBO Max, Spotify, etc.
Pool Maintenance – Chemicals, open/close, etc.
Home Maintenance – Repairs,
Lawn Care – Mowing, lawn treatments
Auto Insurance
Gifts – Birthdays, weddings
Kids’ activities – Gymnastics classes, play dates
Vacations – Flights, hotels, activities
Kids’ birthdays – Party costs
Dog food
Umbrella Insurance
If you’ve ever been bitten by an expense that you knew was coming, a sinking fund is your solution!
How to Set Up a Sinking Fund
1. Identify Your Sinking Fund Categories
Start by listing out all the expenses that don’t fit into your regular monthly budget. Think about annual, semi-annual, and irregular expenses.
2. Calculate How Much You Need to Save
For each sinking fund, determine the total amount you’ll need and the deadline. Then, divide it by the number of months or paychecks until the expense is due.
Example: If you need $600 for Christmas shopping and it’s 6 months away:
- $600 ÷ 6 months = $100 per month
- Or $600 ÷ 12 paychecks = $50 per paycheck
3. Decide Where to Keep Your Sinking Funds
My recommendation? Use a bank like Capital One 360 that lets you create up to 30 savings accounts without minimum balances or fees. You won’t have a brick and mortar bank to access funds through, and you won’t earn a large amount of interest, but these accounts are relatively small relative to your whole portfolio.
4. Automate Your Savings
Set up automatic transfers to your sinking fund accounts, or manually move money each month to stay on track.
How to Track Your Sinking Funds
One of the easiest ways to stay organized is with a sinking funds spreadsheet.
Download My Free Excel Sinking Funds Template [Insert Link to Your Excel Template]
This template allows you to:
Track multiple sinking fund categories
Set goals and deadlines
Automatically calculate how much to save each month
Watch your progress in real time
Common Sinking Fund Mistakes to Avoid
Not starting early enough – The sooner you start, the less you need to save per month.
Not knowing yourself – Only you know if you can be successful with 5 categories or if you’d do better with 20.
Treating sinking funds like an emergency fund – Don’t use these funds for unrelated expenses.
Not adjusting for life changes – Review your sinking funds regularly and tweak them as needed.
Let’s Get Real
Sinking funds give you financial control and peace of mind. Instead of scrambling when irregular expenses arise, you’ll already have the money set aside. The key is to be consistent with your savings.
HOWEVER – I can tell you most months I go over in my other budget categories and end up reducing from some categories of my sinking funds where I may be a bit ahead or have some time to catch up. LIFE HAPPENS! You’re much better off saving for 50 or even 20% of your categories than throwing in the towel.
Let me know in the comments: What’s the first sinking fund you’re setting up?
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