Listen! I like making our finances as simple as possible and planning for future expenses is no exception. That’s why we like the concept of sinking funds, or the sinking pot in our case (more on that later).
If you’re tired of having irregular expenses throw you off of the budgeting bandwagon, this post is for you!
What is a sinking fund?
A sinking fund is basically a revolving savings fund that has sufficient cash to meet monthly and annual anticipated expense needs.
You establish a sinking fund for one main purpose: To accumulate money for non-monthly or irregular expenses to prevent creating a deficit when those KNOWN or planned expenses occur.
Sinking funds are not meant to cover emergencies such as vehicle or home repairs – that’s what your emergency fund is for.
Examples of irregular expenses:
- Vehicle tag renewal fees
- Auto insurance bills (if you pay annually, which could save you money)
- Holidays (decorations, gifts, travel)
- Birthdays
- Vacations
- Entertainment (concerts or events)
- Property taxes
- Back to school shopping
- Pet grooming and checkups
- Personal medical payments (co-payments, non-covered expenses, etc)
Sinking funds help take the shock out of many larger expenses as well because you save up for them over time. Once the payment is due, you already have the money squirreled away rather than having to scramble to find money to cover the payment.
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How to set up sinking funds
Time needed:Â 10 minutes.
How to set up sinking funds
- Start by listing all of the expenses that you would like to save for.
- Set a target date.
- Set a total amount to save.
- Calculate the number of months you have to save based on the target date.
- Divide the total amount to save by the number of months and put the result for each expense into your monthly budget.
Here is an example of what sinking funds look like in our budgeting spreadsheet sets:
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Where should you keep your sinking funds?
Where you store your sinking funds is largely dependent on how soon you’ll need the money. I think it’s smart to keep your short term funds stored in an account that’s attached to your primary bank. That way, you can easily transfer money as soon as you need it.
For expenses that are 6 – 12 months in the future, we’d recommend putting those funds into a high-yield-savings account. When your money is stored for a longer period of time, you have an opportunity to earn interest while you wait to use it.
We all like free money, right?
Why you may not even need sinking funds
If your income is significantly greater than your expenses, there’s really no reason for you to have sinking funds since you can cover expenses as they come (unless you just don’t want to).
In our case, we don’t need to prepare for every potential irregular expense that pops up. This is due to the fact that we can cover those random expenses from our monthly leftover money, so we created an alternative to sinking funds.
Our alternative to sinking funds
Instead of taking an expense and dividing it by the time we want to save up for it, we have a sinking pot which is set up similar to an emergency fund. Say we budget for $5k in annual miscellaneous expenses. Each month we just send a leftover chunk of change to our sinking pot until it is full.
Benefits of a sinking pot:
- Less complicated because everything is in ONE place.
- You can earn extra money from interest on the total balance of your sinking pot if you keep it in a high-yield savings account.
- You aren’t tracking a bunch of potential expenses.
Why this works for us
Our biggest irregular expenses are concert/event tickets, vacations, and travel to NC. Due to the nature of DJ’s job, we can’t really plan too far in advance so having 1 big pot to take money from helps us do things on a whim.
Having a monthly fun category and monthly house expense category also keeps our budget in check (most of the time).
That’s it! Pick your version and try it, family, you have nothing to lose. Try out a sinking fund or sinking pot – plan, save and have more peace in your budget.
$tay Wealthy fam,
— Dannie
Hey guys, this is super helpful. Thank you.