Have you ever had a large expense sneak up on you and burst your monthly budget? Yeah… We’ve all been there.

But the good news is that there’s an easy solution to this problem! And that’s with sinking funds.

We have been using sinking funds in our budget for years now to plan for upcoming expenses. Maybe they’d help you too!

What Is A Sinking Fund

A sinking fund is a saving account for a special purpose that you know you’ll spend money on in the future. It’s often for an expense that occurs infrequently or has a high price tag.

Why Use A Sinking Fund

Sinking funds are often used for a few different reasons!

A large expense you know is coming up.

If you know how much an expense will be and when it will be due, use a sinking fund! You can take the total cost and divide it by how many months you have until that expense comes up. Then save that amount each month and you’ll have enough saved!

For example, your car insurance premium is paid annually at $600. Rather than $600 bursting one month of your budget, you can save $50 each month over the year and you’ll have all the money set aside when the bill comes due!

You don’t have the money to pay for it all in one month.

If you have a large expense coming up that you can’t cover in one month, this is another great use for a sinking fund!

Let’s say your property tax is $6,000 annually. And you can’t cover that in one month of income. So instead you set aside $500 each month into a property tax sinking fund to ensure that you have enough saved for when the bill comes due.

You spend money on an expense category often but the amount varies each month.

I also like to use sinking funds if the amount of a certain expense varies each month. By using a sinking fund, I’m able to make this a consistent amount in our budget. It adds more stability rather than highs and lows.

For example, some months you spend $200 on gifts and other months you spend $0, depending on the time of year. So you set aside $50 a month into a gifts sinking fund and this allows you the permission to spend on gifts when you have enough in your sinking fund!

You know you’ll eventually spend money on a large cost but not sure when.

Some sinking funds make sense when you know exactly how much you will spend and when. But it’s also helpful to set up a sinking fund for a large expense that you know will come up eventually, but aren’t even sure how much it will be.

For example, you’re a homeowner. And you know that you’ll have to repair things on your house from time to time. You just aren’t sure what’s going to break, when, and how much it will cost. So you begin saving money every month so you have cash to pull from whenever that time comes.

Sinking Funds To Use

Personal finance is personal and you can use a sinking fund for anything that you want! But here are some common sinking funds you could consider adding to your budget, if it makes sense for you.

Christmas

Vacation

Gifts

Car Maintenance

House Maintenance

Medical

Insurance Premium

Property Taxes

Car Replacement

Extra Giving

Baby Expenses

Anything else that you don’t want to pay for all at once in one month.

How To Structure Sinking Funds In Your Budget & Bank

One of the most common questions I get asked is how we structure our sinking funds. Again, personal finance is personal! So this may look different for everyone. But there are a couple commonly used options:

Open a bank account for each sinking fund

You can open a separate bank account (or bucket) for each sinking fund you want to save towards. This way it’s easy to see exactly how much you have in each fund. You’ll just have to transfer money in and out during the month.

Use your budget to track how much is in each fund

You can keep the total of all sinking funds in one bank account and use your budget to know how much is in each! This is the process that we do. I prefer it this way so I’m not having to transfer in and out each month. And my budget is up to date to know how much is available in each fund! 

While this is the process that works for me, it might not be for everyone and that’s okay! Personal finance is personal and you should do whatever is easiest for you.

Sinking funds have been a game changer in our budget, and I love tracking them each month! If you want to learn more about sinking funds and how to budget, check out my Budget Breakdown Course! It includes everything you need to know about budgeting to enjoy life while working on financial goals.