Organize Your Savings
Utilizing sinking funds to organize your savings is absolutely vital in maintaining your long term financial growth and ensuring you are as prepared for the unprepared as you can be.
What is a sinking fund?
Now, you’re probably thinking ummm what the heck is a sinking fund? I’m so glad you asked! A sinking fund is basically money you set aside each month for a specific expense. The name sounds weird but it comes from the idea of setting aside money to pay down long term debts so the word sinking refers to the lowering of your debt. And you can use these to set money aside for any kind of expense, not just paying off debt.
So, how do you use these in your own personal life? Man you I’m so glad you asked! So each month when you set money aside for your savings account, assign that money to a category.
Sinking Fund Examples
The types of categories you might need to set up will vary and it depends on your lifestyle. If you own a home vs rent, you’ll have different needs for sinking funds, for example. But to give you an idea of things to think about setting up sinking funds for..
Let’s say you own a home and you know that the driveway will need to be redone in the next 5 years. That’s a huge expense that you should really plan ahead for. So in this example, you know you can probably wait about 5 years and it’s going to cost around $8,000 this means you’ll need to set aside $1600/year or about $133/month. Planning ahead means that the amount you need to save each month is way more do-able than say you need one in 1 year.
Okay, so what are other examples? Well I’ll just give you an idea of what sinking funds we have in our personal budget. For some background, we rent a townhouse so many home repairs that you may need to keep in mind if you own, won’t be included for us. We also have a newer car, two cats, no kids and we live far from our family. With that in mind, things we have sinking funds for are car maintenance. For us, this is a fairly minimal amount because we don’t need much more than oil changes and we are still under warranty for many repairs. Once we get close to that warranty running out, we’ll start building that sinking fund up a little more. I think right now it has like $250 or something.
A biggest portion of our sinking funds, is actually for travel. Partly because we love to travel and it’s important to us so we set money aside so that we can afford to take the trips that we want. Unfortunately COVID ruined our travel plans this year...but those funds are there ready for whenever we finally get to travel again. We also live half way across the country from our families. We live in Washington and our family is all in Kansas. If something happens and we need to get home right away, we have money in a sinking fund for the very purpose of paying whatever we need to get home as quick as we can, if we needed. We also know that we’ll be going home at least once a year or for big occasions like my sister is getting married in April. So we plan ahead for all of these trips and it’s the only way we can afford to take them. It’s planning ahead and setting money aside each month for these things.
Another one that we have now is a fund for vet bills. Soooo, I’ll be honest...we didn’t have this set up until like a month ago. Not very smart of me, I knew better but...our cats are pretty healthy and rarely need to go to the vet. However, they are getting older and last month one of our cats somehow hurt his leg. Aaaand $700 later, we have no clue what he did but we were able to get him taken care of to ensure it wasn’t anything serious and provide him some meds so he wasn’t in pain. Since we didn’t have that money set aside though it had come from somewhere...So I mentioned we didn’t get to travel this year, but we had money set aside for it. One of those trips was to Japan. Since I have no clue when that will be able to happen, I did have to pull money from that sinking fund to a newly created vet bill fund to cover those costs.
In this case, I was able to pull from a fund we won’t be using any time soon so it wasn’t a huge deal, but it’s important to really look at the things you own or what have in your life that mind create big expenses because you may not always have that unimportant fund to pull from.
So really take a look and think about what you might have coming up. If you own a home, there could be so many things. Repairs to the actual home, like the roof, siding, or windows. And then there are things like appliances, water heater, AC. For your car, besides maintenance, you might need to set money aside for tags or tabs or registration or whatever it is you call it where you live. Apparently it’s different. I just always thought it was tags and when we moved to washington I didn’t understand why people were saying tabs. I thought they were just saying it wrong or I was hearing them wrong. Nope, they just actually call it tabs here. But that’s besides the point..
If you have kids, it might be fees for sports or other activities. If you don’t have an HSA (something we’ll talk more about later), but you might need to be setting money aside for medical bills. One that really helped us was setting money aside for Christmas. Are you saving for that? Do you have birthdays or other celebrations that you might need to spend money on?
I’ve also recently started setting up sinking funds for bills/expenses that we pay annually. So things like our Amazon Prime we pay annually and now I’ve been setting aside a little each month for it. Renter’s insurance is annual too so we have a fund for that. And other smaller subscriptions like Dashlane, HomeAgain, DownDog App. Basically what I’ve been doing in the last year, is everytime a big purchase comes up that I don’t have money set aside for, I create a sinking fund. I try to be as proactive as I can, but for anything I’ve missed I make sure to create one for it for next time.
Utilize sinking funds to spend intentionally
Sinking funds are a great way to plan ahead for big expenses that will or will at least most likely happen in the future. But they don’t always have to be for things that are boring like car maintenance. For example, I mentioned that we have sinking funds for travel. You can create a sinking fund for anything that is important to you. So let’s say you really want a pool in your backyard. Make a sinking fund for it! Take a look at your budget, find out how much money you could set aside each month for it and create the plan to make it happen!
I’m sooo sooo big on intentional spending. If having a pool is important to you, do it! But think about how you’re currently spending your money. Maybe that pool is more important to you than your mani/pedi you get every other week. Prioritize where you want your money to go and be intentional about it.
How to implement sinking funds
Now you might be wondering how you actually set this money aside and keep track of it all. There are a couple of different ways you can do this.
One is just using an excel spreadsheet. If you want a template, shoot me a quick message on IG or FB and I can send you a google spreadsheet template. Basically you’ll track the amount you put into your savings account and then list out each category with how much of your savings goes to each category so that the total adds up to the amount in your savings account. Hopefully that makes sense. If not, message me and I can walk you through it real simple.
Now the way that I do it and what I would recommend is using YNAB. If you listened to episode 2 on budgets, you know I love YNAB and think everyone should use it. And this is another reason why. It sooooo easy to create and track sinking funds using YNAB. Within the app, you are already assigning every dollar a job. So you just create a new line item for whatever expense you want to start savings for. Then for each item, you can create a goal. So say, like our example of replacing the driveway, you create that sinking fund in YNAB. You’ll create a goal that says you want $8,000 in 5 years. It will calculate for you that you need $133/month and it will color code it for you until you’ve met that monthly goal amount. It’s so easy and sooo freaking useful. I can’t even tell you.
Sinking Fund vs Emergency fund
Just really quickly I also want to touch on what the difference is between a sinking fund and an emergency fund. In my example of our vet bills that I didn’t have a sinking fund for, that was an unplanned, unbudgeted expense. In this case, if needed, I could have pulled money from our emergency fund. But because I had what I would call unimportant sinking funds already, I chose to use that money instead. Emergency funds are meant to be used for exactly that, only emergencies. Things you didn’t plan for and can’t avoid.
So just a quick recap...Sinking funds is basically setting money aside each month for big ticket expenses or those non-recurring expenses you want to plan ahead for. When creating your sinking funds look at where you spend large chunks of money throughout the year so you can start planning ahead for those things. Also think ahead for things that only happen every few years or things you want and don’t necessarily need. Those items that are important to you and bring you joy. Put those sinking funds in your budget and make them happen!
Sinking funds is really where the magic happens with your budget. They are what makes the difference between feeling like you don’t have the money you need for things or money for the things you want and instead feeling confident that you are prepared for what might come up in the future and excited to be planning ahead for the things you want.
