If expenses constantly catch you off guard, you may want to set up sinking funds or money you set aside for large goals. There are thousands of sinking funds categories you can use to save your money, but choosing the ones that ring true for you is the best bet.
When you set up a sinking fund and use a sinking fund tracker, you are well on your way to meeting your financial goals without putting yourself into debt.
Here’s everything you must know about choosing the right categories and saving money for your sinking funds.
What Is a Sinking Fund?
A sinking fund is a fund you have set aside for a specific expense. It can be a one-time expense or an ongoing expense. For example, you could have a Christmas sinking fund to cover the cost of gifts and holiday gatherings. You may have another sinking fund for insurance premiums that you pay twice a year.
There’s no right or wrong way to have a sinking fund account, as long as you save money and keep it separate from your emergency fund.
Sinking Fund vs Savings Account
Sinking funds have a specific purpose and deadline. You might have a sinking fund to pay for your car repairs or for dental expenses, for example. You deliberately set aside money for these occurrences that you know will happen.
A savings account is more of a ‘catch-all’ for long-term goals such as retirement savings, a down payment on a house, or just to have money set aside for an emergency. Money in your savings account doesn’t have a specific purpose except to grow and be available for you at some point in the future.
What Is the Purpose of a Sinking Fund?
A sinking fund’s purpose is to meet specific goals. Each sinking fund has a category it’s tied to, so you are intentional when using the funds.
When you have a sinking fund for specific purposes, saving in small increments versus one lump sum is easier.
Benefits of Sinking Funds
Because sinking funds make saving for your financial goals easier, you’ll likely achieve them faster. In addition, when you have specific sinking funds categories, you don’t have to worry about splitting your funds up for different expenses or wondering if one expense, such as car repairs, is reason enough to withdraw from your sinking funds.
Having specific sinking funds categories also helps motivate you to save money. When you’re saving just because it’s the ‘right thing to do,’ it’s a lot easier to let it slide and impulsively spend money.
When you have specific reasons for saving, though, you’ll be more likely to budget wisely, putting money aside each month for your goal.
When you have sinking funds, you’re also less likely to feel financial strain when something happens, such as your car breaking down or you have unexpected medical expenses. Handling these issues without financial stress can create peace of mind.
How to Start Sinking Funds
If you’re starting from scratch, it can feel overwhelming to start a sinking fund. You might wonder how much you must save, where you should put the money, and what reasons are ‘good enough’ for a sinking fund.
Determine Your Savings Capacity
To build a sinking fund, you must know how much you can save. Now is the perfect time if you haven’t created a budget yet. Determine how much money you have left each month after covering the necessities. Next decide how much of that money you can set aside for your sinking funds.
It’s best to have multiple sinking funds so you don’t have to make hard decisions down the road. To choose the right sinking fund categories, you must have financial goals. However, they don’t have to be anything crazy.
A few sinking fund examples include a medical sinking fund, Christmas fund, car sinking fund, or vacation fund. Honestly, the sky’s the limit. Think about what you want to achieve in the near future and create a sinking fund to save for it.
Estimate the Cost
Getting super specific with your fund categories and the cost of the goal is important. It allows you to target your goals and put your money where it’s most needed. Once you fill your essential sinking funds, you can move on to more ‘fun’ categories, like a vacation or special events.
Decide if your sinking fund categories have deadlines or if they are ongoing. A sinking fund example that may not ever expire is a fund for medical expenses. You’ll always need healthcare, so this one is sort of open-ended.
A sinking fund example with a deadline could include a down payment on a car or a fund for a specific purchase, such as furniture for the house.
If your sinking fund category has a deadline, make a note of it because you’ll need it when you create your budget.
Create a Budget Category for Each Sinking Fund
Once you have your sinking fund categories created, it’s time to decide how much money you’ll put in each fund. Then, in your monthly budget, figure out how much money you can save and how you’ll divide the funds among your sinking fund categories.
If you have a specific dollar amount you need saved, divide it by the number of months in your timeline, and that’s how much you must save to reach your goal.
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Choose Where You Will Save Your Sinking Fund Money
Keeping sinking funds separate is the key to not spending money that you have earmarked for specific expenses.
You can have a separate savings account for each sinking fund or keep them all in one account. Some banks even offer the option to set up ‘buckets’ so you can separate your savings according to what you need for each goal.
Before you choose a bank, read the minimum balance requirements or any monthly fees they might charge so you can avoid them if possible.
Automate Your Savings
The easiest sinking fund approach is to automate your savings. This eliminates the risk that you’ll overspend and forget to put money in your savings account. You can set up automatic savings either with your employer via direct deposit or most banks offer automatic transfers free of charge.
Sinking Fund Formula Calculator
Fortunately, you don’t need a special calculator to determine how much you should save for your sinking funds.
You simply divide the cost of your goal by the number of months before you need the funds. The result is how much you should save each month to reach your goal.
26 Sinking Funds Categories
1. Back-To-School Expenses
Back-to-school time can be expensive. Between tuition, clothes, school supplies, and miscellaneous expenses, it’s best to have a sinking fund set up for this time of year, so it doesn’t sneak up on you. You could also include the cost of field trips, replacing school supplies throughout the year, and teacher gifts to prepare yourself even further.
Figure out now how much your insurance would cover if your children need braces. Of course, every insurance policy is different, but you could get 25 – 50% covered in some cases. Even if you have insurance, though, setting aside money now to cover the cost of braces can be helpful since they can cost $5,000 or more per child.
3. Car Purchase
If you need to buy a car in the near future, consider saving for the down payment. The less money you borrow, the less it will cost you in interest. Investing money up front offsets the car’s immediate depreciation when you drive off the lot too. Pick an estimated amount you might spend on a car and aim to save 10 – 20% of the sales price.
4. Car Repair
Even if you buy a new car, it will need repairs and maintenance. So when thinking of sinking fund ideas, a car repair fund should always be a part of it. If you have a warranty, have at least the deductible put aside. But also think about regular maintenance, such as oil changes, tire rotation, new tires, etc.
5. Child-Related Expenses
The average cost to raise a child from newborn to 18 is $233,610. Therefore, making child-related expenses an ongoing essential sinking fund is important. Think of costs like child care, activities, clothing, medical care, food, and miscellaneous expenses. It’s a lot easier to have the funds saved than to go into debt to cover the cost of having kids.
One of the best examples of sinking funds is clothing. Everyone needs clothes, so why not have an ongoing fund for them? You’ll need new clothes when the seasons change when your kids grow, and for special occasions. It’s much easier to know you have a separate sinking fund for clothes, so you don’t have to worry about how you’ll afford them when you need them.
7. Date Nights
Date nights might not feel like an essential sinking funds category, but it truly is if you want to keep your marriage alive. Time apart is important, so why not save money, so you eliminate the excuse that you don’t have the money? Have some fun with your spouse and enjoy your night on the town, knowing you worked hard to get there.
Dentist costs can be high, especially when you need work beyond a standard cleaning. If you don’t have dental insurance, you’ll need a lot more money set aside for your dental care. Think about if something goes wrong and a child needs a tooth pulled, or you need emergency dental work. Having the money available makes it a lot easier to handle. Even if you have dental insurance, put money aside for the insurance premiums plus your portion of the costs. Most dental plans pay a percentage of your expenses, but not 100% of them.
9. Family Expenses
Family expenses can be a catch-all category for your sinking funds categories. For example, you can include family vacations, family outings, birthday celebrations, or even doctor visits in the fund if you’d rather not have individual sinking fund categories.
10. Family Photos
If your family enjoys an updated annual family photo, put the money aside each month to save for it. Hiring a professional photographer for a few hours to take your family’s pictures can get pricey, but if you save for it now, you can enjoy the treasure for years to come.
Furniture doesn’t last forever, and it always feels like you need it at the worst time. So rather than applying for a store credit card and paying interest, put money aside each month to save for it. This sinking fund example might not come to mind often, but when you need the money, you’ll be glad it’s there!
Gifts can knock us off our budget faster than we realize, especially when you need them during a time when funds are tight. Make a list of typical birthday gifts, Christmas gifts, and other holiday or special occasion gifts you give and create a sinking fund category for it. You can separate your sinking funds by holiday or lump them all into one. It’s up to you and what sinking fund approach you want to take.
If you look back at your spending over the past holidays, you’ll likely notice that you spend on more than gifts. Most of us focus on gift-giving and not on the cost of entertainment, clothing, and decorations that go into these holidays. Think about how your family celebrates and create separate savings accounts for these holidays, so you have the cash to pay for them.
14. Home Maintenance
All homes need regular maintenance. On average, home maintenance costs 1% of a home’s value, but that doesn’t mean your house won’t need more repairs. Sinking funds work well for home maintenance because issues usually happen at the worst times when you don’t have the funds to cover them. Knowing you have money in a high-yield savings account for the costs can be lifesaving.
Insurance is one of those expenses that can sneak up on you. Homeowner’s insurance for example, is only due once a year and car insurance is two semi-annually. If you don’t put money aside for these expenses, you might find that you have a large bill due without any room in your budget to pay for it.Instead, use a sinking fund calculator to determine how much money you should save each month to cover the cost.
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Even if you have health insurance, you’ll still likely have medical bills. Things like checkups and other preventative tasks might be covered 100%, but most people pay a percentage of the cost of their care.What if you or a child ends up in the hospital? This is one of those sinking funds examples that can make a difficult situation much easier by alleviating the financial stress. Since you don’t know how much you’ll need for medical emergencies, save what you feel comfortable saving.
17. Personal Expenses
Having sinking funds just because you want to have the ability to go to the spa, get your hair colored, or take a weekend trip is okay! You don’t have to label what you’ll do with the money in this sinking fund category. Just know that you have ‘fun’ money put aside to help you enjoy life when you want.
18. Pet Care
Pets are a part of our family and often need just as much care as we do. Think of vet visits, grooming appointments, and boarding. It’s a good idea to have emergency savings set aside, too, because pets can have emergencies just like humans.
Self-care is important to keep your stress levels down and take care of your health. Self-care and personal expenses may have some of the same idea, but self-care can also include therapy appointments, wellness checks, and even a girls’ getaway.
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20. Special Events
If you’re the planning type and know what special events you have coming up this year, start saving for them now. Things like concerts, weddings, birthday parties, wedding or baby showers, or sporting events are just a few sinking fund examples.
These make great sinking fund categories if your kids go to private school or you want to save for college now. School at any age is expensive, so the more money you save, the easier it will be to afford it.While you might want to consider a College Savings Plan for college expenses, the more money you can set aside for college now, the easier it will be to afford it when your child goes away.
When you think of examples of sinking funds, you probably don’t think about utilities. Yet, they are a regular expense, so why save for them? Some utility costs fluctuate throughout the year. Gas costs, for example, are higher in the winter than in the summer in colder areas. Consider making monthly payments to your sinking fund for utilities that may fluctuate so they are easier to afford year-round.
Whether you’re planning your dream vacation or just a quick getaway, a vacation fund can be an essential sinking fund. Everyone deserves to get away every now and then, and when you make room in your monthly budget for it, you can afford it a lot easier.
Health insurance doesn’t always include vision coverage. Even if it does, it’s easy to spend $500+ at the eye doctor when you need new glasses or contacts. If you and/or your family members need corrective lenses, consider adding vision to your sinking funds categories.
Whether you’re getting married or your child is, you’ll have significant expenses on the big day. While this can be considered a long-term goal depending on how long the engagement is, it’s not a bad idea to create a sinking fund for it and put money away each month.
26. Yearly Renewals
Yearly renewals can sneak up on you before you realize it. It’s one of those ‘out of sight, out of mind’ things until it hits you again. Think of any annual renewals, including insurance premiums, subscriptions, or any other plans you pay for. Figure out how much they cost monthly and put the money away.
Sinking Funds Categories FAQ
How Much Do I Need to Put In My Sinking Fund?
How much you need in your sinking fund depends on what you are saving for and how long you have to save. For example, a smaller goal may only need a few hundred dollars, while a larger goal could need a few thousand dollars.
Take your time creating sinking fund categories that make sense for your lifestyle and figure out how much each sinking fund needs to determine your ideal amount.
Where Should I Keep My Sinking Funds?
Keeping your sinking funds in a high-yield savings account is always a good idea. If you have longer-term goals, you might put some of the funds in a CD so they can earn even more interest.
The key is keeping your sinking funds separate from your regular savings or spending accounts. It’s too easy to spend the money rather than save it when it’s not in a separate account earmarked for a specific expense.
How Many Sinking Fund Categories Do You Need?
You can have one sinking fund or multiple sinking funds. The choice is yours. It’s a lot easier to track your progress with a sinking funds tracker when you have multiple accounts, one for each goal. But for some people, that’s too much, and they prefer to have one large fund to cover everything.
Can I Have Too Many Sinking Funds?
You can only have too many sinking funds if you overwhelm yourself or can’t keep up with the payments. So prioritize your sinking fund ideas to save for the most important things first. If there’s room for more, then great. But if not, don’t overwhelm yourself.
How Is a Sinking Fund Different Than an Emergency Fund?
Emergency funds are for true emergencies or things you didn’t see coming, such as a job loss or illness. For example, if you’re unable to work, your emergency fund should cover your monthly expenses for at least a few months.
A sinking fund is for a specific goal that you want to achieve. You know it’s coming, and you want to spend the money and save to achieve the goal.
Related Article: How to Determine Where to Keep an Emergency Fund
When Should I Start Using a Sinking Fund?
You should start saving for a sinking fund as soon as you have an idea of why you need it. For example, if you want to save for insurance premiums, medical care, a vacation, or a down payment on a house, you should start the account immediately to reach your goal.
What if There’s Not Enough in My Sinking Fund to Cover an Expense?
If you come up short with your sinking fund, you’ll have to go back to the drawing board. First, see if there’s room in your budget to make up the difference. If not and it’s an expense that isn’t necessary, you may have to put your goal off for a little longer until you can save the funds.
If it’s something necessary, you may have to revisit your budget and play with the numbers so you can make the expense fit. It might take a little sacrificing in other areas, but hopefully moving forward you can figure out what went wrong.
What Are Sinking Fund Envelopes?
If you don’t want to own multiple savings accounts, you can create sinking fund envelopes to put the money in for each goal. Of course, it’s better to have the money in an interest-bearing account, but envelopes are a great way to start saving.
The Bottom Line
If you don’t have any sinking funds categories set up yet, start small with one or two. Then, figure out how to work the payments into your monthly budget and see how it goes. As you reach your goals, you’ll feel more motivated to have more sinking funds categories and reach more goals.
It’s catchy and honestly one of the smartest ways to keep yourself on track with your budget and savings goals.
Samantha Hawrylack is a personal finance expert and full-time entrepreneur with a passion for writing and SEO. She holds a Bachelor’s in Finance and Master’s in Business Administration and previously worked for Vanguard, where she held Series 7 and 63 licenses. Her work has been featured in publications like Grow, MSN, CNBC, Ladders, Rocket Mortgage, Quicken Loans, Clever Girl Finance, Credit Donkey, Crediful, Investing Answers, Well Kept Wallet, AllCards, Mama and Money, and Concreit, among others. She writes in personal finance, real estate, credit, entrepreneurship, credit card, student loan, mortgage, personal loan, insurance, debt management, business, productivity, and career niches.