Do you know what sinking funds are? If you do, great! If you don’t I’m about to get you hooked. They are LIFE CHANGING. They will have a huge impact on your budgeting and they are super simple to get started.
As someone who’s been debt free for over 7 years now, I can say that sinking funds have been a major habit that has helped our family stay on track and be prepared for unexpected expenses.
What are sinking funds
A sinking fund is a fund that you set aside each month to go towards a specific expense, savings, or payment. Primarily it’s money to allocate towards a specific savings goal. So instead of a generic savings account, these are mini saving funds with a purpose or saving with intention. There is usually a predetermined amount that is added to the sinking fund each month. Businesses can have sinking funds, but that’s not what we’re here to talk about, we’re going to be focusing on sinking funds in a family budget.
6 Sinking Funds Every Family Should Totally Have
We all know Christmas comes every year, but many people will wait until October or November to begin thinking about how they’re going to pay for those Christmas gifts. But, what if, you started preparing for that as early as January. Each month, you put a little bit of money into that Christmas sinking fund and by the time December rolls around, you’ve got the money set aside and you no longer need to stress about how to pay for the Christmas shopping.
Some bills aren’t due every month, like auto insurance, yearly memberships, and homeowners insurance. Instead you might only need to pay them once a year. It’s easy to forget to set aside money to pay these bills. That’s why it’s perfect to set up a sinking fund for each of these. Simply divide the bill amount by 12 and add that amount to the fund each month. That way, when the bill comes up, you aren’t hit hard that month.
These also come up every year and we rarely think to add them into our monthly budget. Why not set up a sinking fund. That way, when a birthday does come up, you have money in the fund ready to be spent on the gift!
Holiday decorations and food
Oftentimes when we go to family parties or holiday celebrations, it’s like a potluck, we all bring something. If we’re hosting, we also have to spend on the decorations, too. The expense can sometimes be a big hit and I don’t always want it to come out of my grocery budget. Instead, I set up a sinking fund to cover those expenses when they come up.
Create a separate sinking fund to add some money into a vacation fund. That way, when you get to the amount you need, you can pay for your vacation upfront instead of charging and then being left with bills to pay once you return.
Home and car emergencies
And you can’t forget those unexpected emergencies. Things break down all the time. Kids get injured and sick all the time. Those bills can be a major hit to your budget if you’re not prepared. That’s why it’s great to have a sinking fund set aside specifically for emergencies.
Can I set it up digitally?
Yes! It is so easy to set up your sinking funds digitally. I use an app called YNAB (You Need a Budget). It’s personal budgeting software and it’s available for Windows, Mac, and iOS. You can set up as many or as few as you’d like and you can make them as specific as you’d like. You can start with one or two, like a vacation and Christmas, and then grow from there. Setting up your sinking funds on an app is super simple.
How to set it up with cash envelopes
If digital is not your thing, you can instead use cash envelopes. Take out some cash and put it into an envelope. You can do this two different ways. The first way works like this: if you have five different sinking funds, take five envelopes, label them, and add the specific amount to that envelope each month. If you don’t want to have multiple envelopes around, you can use one envelope and track how much is in the envelope for each fund on the front of the envelope. Keep it all itemized right on the front of the envelope for convenience. This might be a bit easier than having multiple envelopes.