What in the Sam Hill are Sinking Funds?
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I can’t get on pinterest or instagram recently without hearing about sinking funds.
I’m ashamed to admit it took me weeks to actually look into what in the world “sinking funds” means.
And it turns out, I’ve been building them all along.
Basically, a sinking fund is a specific account/fund/envelope with a specific purpose, to which you regularly add money towards that specific purpose.
Why Do You Need a Sinking Fund?
If you happen to follow the Dave Ramsey baby steps (just hopefully not this one), you know that he recommends keeping two emergency funds in place – a little emergency fund with $1,000 (my budget friends and I call this the “oh shit!” fund for incidental annoyances), and a fully stocked fund with 3-6 months salary set aside to cover larger expenses or potential job loss.
He also recommends (though not in the baby steps) to utilize sinking funds in order to budget for everything, expected or unexpected.
But First, On Privilege:
I am fully aware that there are many people from all walks of life who read my blog and (hopefully) glean some helpful information. There are probably also many who are barely making ends meet financially. If you are scraping by and being frugal as a way to survive right now, I want you to know that these are things to implement when you are further along in your journey. If you can only save $5 a month right now, then good for you! That $5 will grow.
In our first year of marriage (2014), we made a grand total of $16,000 – and that included me cashing out a $2,000 401k from my first job. It was rough, and I remember we struggled to put anything into savings that first year.
We are now in a place where we are able to have sinking funds and direct money that is not going towards bills in a way that makes our lives easier. If that’s not you yet, please do not feel as though you can’t get ahead in life without a sinking fund. We did it, and you can too. Keep working, you’ve got this.
– Back to the topic –
Sinking Funds for Intentional Spending
Have you ever saved up for something you really wanted? Diligently set aside money each paycheck for a certain outcome, like a new car or a vacation? Then you, my friend, have set up a sinking fund.
Intentionally Spending with Sinking Funds
Sinking funds are amazing for spending your money intentionally because it was already earmarked for that specific purpose from the very beginning. There is no temptation to “treat yourself” at a Macy’s Labor Day sale with your dream car fund, because that means it will take you even longer to replace your clunker.
Plan For the Unexpected with Sinking Funds
One of the sinking funds I think everyone should have is a car care fund. This includes things like repairs and oil changes. This makes unexpected expenses like getting your battery replaced because it died in the middle of a parking lot an annoyance, instead of a potentially budget-altering crisis.
And that leads me conveniently to…
Sinking Funds Protect the Emergency Fund
The emergency fund should be protected as much as possible. This goes beyond just recognizing that a sale on organic coffee by the bucket is not an emergency.
Let’s keep going with the car example: There are several expenses you will encounter throughout the year that you can anticipate – things like personal property tax, state inspections, basic care and maintenance, and normal replacement of worn down parts (like brakes or brake pads).
These things are not emergencies.
These are normal, expected expenses, and need to be budgeted for as such.
How Do You Set Up A Sinking Fund?
However you choose to set up a sinking fund is completely up to you. I have done all three of the following ways, and I find pros and cons to all of them. I will do my best to list them all here so you can decide which route sounds best to you right now!
Cash Envelope Savings
Back when I strictly followed the cash envelope system, my “travel” sinking fund was a shoebox. I kept it on the top shelf of my closet, behind a shoe box that actually had shoes in it (you know, in case the fictional burglar I was hiding my money from would be looking through my shoe boxes). It was so fun for me to see a visual representation of all the money I was accumulating through my diligent savings efforts, and imagine all the fun adventures I was going to be able to go on thanks to my work.
- visually encouraging
- readily available when you need it
- not earning interest
- possibly too easy to access (depending on your level of discipline)
Using Savings Accounts for Sinking Funds
I’ve also used multiple savings accounts for sinking funds, and labeled each one with a “nickname” for my online banking. This was by far the easiest one for me, because I organize most of our funds through my banking app. I love being able to check in at a moment’s notice, whether I am near my budgeting notebook or not.
- Budgeting at your fingertips
- Easier to transfer money when needed
- Earns interest (especially if you have a high interest savings account!)
- Some people are uncomfortable having all the money located under the same banking login and password
Have All Sinking Funds Under One Main Account
Another way you can create your sinking funds is to add up all your sinking fund lines in your budget and move them into a single account in one lump sum.
- One monthly transaction when budgeting, instead of multiple smaller transactions to different accounts. If you still manually balance your checkbook, this is a a nice time saver.
- This requires incredibly detailed accounting, to know exactly how much you have allotted for each fund. The last thing you want to do is accidentally overspend on one fund and end up short-changing another fund. If you’re big into excel spreadsheets or pencil and paper, this will probably work well for you.
How Many Sinking Funds Should I Have?
The amount of sinking funds you end up creating is entirely personal, but there are a few sinking funds everyone should have (at least, I think so!):
To cover things like oil changes, tire rotations, property taxes, and a little extra to gradually save up for bigger repairs. Ideally, also build up to include your car insurance deductible amount.
Do you have carpets? Your carpets should be deep cleaned at least once a year, whether you rent a carpet cleaner from the grocery store or you pay a professional.
Is your mortgage paid off? You should probably set aside extra to cover property taxes.
Is your roof more than 10 years old? You might consider starting to set aside a few dollars a month to start saving up for that one, too!
Do you want a new fridge? It comes from this account!
Ideally, you would also want to have a constant cushion of your entire deductible amount for your homeowners insurance.
Even if you’re just saving for a Motel 6 trip to the neighboring town, be sure to set aside a little money every paycheck (or at least, every month) to gradually save up for that trip! This fund covers transportation, food, lodging, and activities, so if you want to go to Disney next year, go ahead and set up a fund now.
One of my goals for next year is to save up our entire family medical deductible in a separate savings account. In the past 18 months, both my husband and I had trips to the ER, and my oldest went to Urgent Care. Needless to say, I am totally over having to budget for medical bills.
Once we have our full deductible saved, I will advance that goal to be our maximum out of pocket cost. Once they are fully funded, I will redirect those monthly payments to another sinking fund to build it up faster. Should we use any money out of that account to pay off medical bills, I will start filling it back up to fully funded again, and then stop.
My friend Whitney Hansen (host of The Money Nerds podcast) shared on instagram stories today that the average American will spend about $1,000 on Christmas this year – and put most of it on a credit card. That means their New Years will start with increased debt – and likely a resolution of “this year I will get better with money.” Yikes!
The smartest thing I did in January was open up a Christmas Club account with our bank. I have money automatically drafted out of our account and put into the Christmas account – which is not accessible until December! I worked it into our budget so I don’t even miss it. Next year, I will probably increase the amount (just by a little bit). Because as children get older, sometimes the things they want get more expensive.
It’s definitely not because I would like a little bit of money to buy some things I want for myself…
How Do I Know How Much to Contribute to a Sinking Fund?
This is probably the worst question ever to pretend to answer, because it’s entirely personal.
Because you are also making sure your “oh shit” fund is full and you might still be building your 3-6 month salary emergency fund, those take bigger priority, and therefore, have a bigger percentage of your available savings allotted.
My best advice here is to write down all the sinking funds you want to have on a piece of paper, and next to each one write the amount you want to eventually have. I’m going back to the cars for this example: Let’s say your car insurance deductible is $500. You also might want to have an additional $700 to cover any unexpected repairs, so you would write down $1,200 next to the car maintenance fund.
Your medical would be whatever your deductible is for your insurance plan. Or your maximum out of pocket if you’re feeling frisky.
Etc, etc, etc, down the line.
Once you have your list of sinking fund goals, look at your savings line of your budget. Giving first dibs to your oh shit fund and your bigger emergency fund, figure out how to split up the remainder into each fund. Remember, every dollar counts. So even if you are putting $5 into 3 sinking funds every month, that is still $15 a month that have very specific marching orders for your financial future.
Other Ways to Build Your Sinking Funds:
If your regular income doesn’t yet allow you to have sinking funds, don’t use that as an excuse to not try – get creative!
- If you get a tax return, allot a certain amount to each fund
- Sell your excess on Facebook Marketplace or the Mercari app, and deposit the money into your sinking funds
- Start a side hustle specifically for sinking fund money
- Birthday money? Sinking fund!
- You get the idea…
What sinking funds do you have already? Which ones are you going to open now that you’ve read this post? Let me know in the comments!
Don’t forget to pin this post for future reference!
Are you interested in more budgeting advice? Check out my signature course, Budget to Bank, for helpful tips and step by step material to help you build a budget that sticks and doesn’t suck!