In this post, we are going to discuss various reasons why it is important to have a sinking fund, including examples. We will also discuss what they are and how they are different than emergency funds and savings accounts. And at the
- What is a sinking fund?
- How is a sinking fund useful?
- What are the 5 sinking funds that you should have in your budget?
90-95% of your expenses are completely predictable so know and budget for them all.
“This is your life. This is your income. This is your protection against unexpected events and expenses.” -Joseph Martingale
What is a Sinking Fund?
A sinking fund is similar to a savings account, but it only has one goal in mind and usually a deadline in place.
For example, let’s say that it is January and you need to have $1,000 saved up before Christmas. This breaks down to less than $100 a month going towards this fund.
It is because this fund is goal oriented that is differs from a savings account. Savings accounts are normally much more general in purpose.
A large stash of money set aside for a rainy day, a new car or anything/everything. Whereas a sinking fund is specific and themed to a single reasoning for it being there.
It’s also much different from an emergency fund.
An emergency fund is money set aside for the unknown.
“The sinking fund is for the known; the emergency fund is for the unknown.” -Dave Ramsey
How is a sinking fund useful?
Sinking funds are very useful because they help to lessen the blow when expected bills come up. You know that Christmas happens every year on the same day. Medical payments, school supplies, and vehicle maintenance happen and are EXPECTED.
While these types of things may be expected, they are also unanticipated because they don’t happen on the same day every year like clockwork.
Making it difficult to budget and prepare for, without a proper sinking fund in place.
By including into your budget plans, special allotted savings accounts geared towards these expected expenses, you can be better prepared.
Set a goal for how much you would like saved into each fund.
Decide when you’d like to have it fully funded by.
And figure out how much that breaks down per month/ paycheck.
Once you reach that goal, you’re done.
The money will sit there, until needed. When you use some, you replenish it and by doing this you keep yourself from going into debt.
While your sinking fund may not cover the complete cost of whatever expense is happening, it certainly can help keep you from withdrawing a loan or pulling out a credit card.
What are the 5 sinking funds that you should have in your budget?
5 sinking funds that can really prove to be useful in your budget include the following:
Even if you rent an apartment, and don’t own a home, there are expenses you can expect to pay at some point. Such as a move out fee, or lease termination fee.
Maybe you want to rent or hire a carpet cleaner, have to paint the walls before you leave or need to pay for a plumber. Things happen in every home, and it’s simply a matter of when.
There are always medical fees of some sort, even in countries with free healthcare.
Paying for a co-pay, prescription, out of network doctor/dentist or an upgrade from what your insurance will cover.
Having the money sitting there and ready reduces a lot of stress in an already stressful situation. So many people refuse medical care for themselves because they cannot afford it.
A sinking fund for medical care would do them wonders.
If you have pets, vet care at some point in their life is a given fact. Shots, vaccines, microchips are all standard practices for animals. Some living areas require pets to be microchipped (such as living on a military post.)
Rabies vaccinations are required as well, and without them, you risk serious consequences if your pet were to bite anyone.
Then there are unexpected surgeries, possibly euthanasia and other costly procedures you can never really anticipate.
Your vehicle needs to be street legal, so every year you pay for new tabs. Registration fees, tires, filters, batteries, new wipers, etc.
Then there is the “what if you get into an accident” scenario, how would you pay your deductible? You can see how this sinking fund can really benefit you.
Every year we have the same holidays as the year before, so you would think that this one would make sense too.
Setting aside enough money for the Easter bunny to give a decent basket, egg hunt, and dress.
Being able to afford the traditional Thanksgiving feast, before summer is even over- because you set it aside in a sinking fund.
Or having Christmas money ready to go before Black Friday ads even come out. You can save money without store cards and not be one of the thousands going into debt for the holidays.
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As you can see, sinking funds are a great asset to your budget.
A few more popular sinking funds:
- Purchasing a whole animal butchered (buying a whole cow or pig at once, can seriously cut down on grocery expenses) See other tips to save money on meat.
- New clothes. You can save money by buying used clothes, but growing is a natural part of life and it’s illegal in most places to walk around nude after you’ve passed the toddler stage of life. So it’s inevitable that you will need to purchase clothing at some point.
- Family vacations.
- Birthday parties or other big celebrations such as baby showers or weddings.
Being able to have money ready when you need it, is not only great for keeping you on track with your financial plans, but also keeps you from undertaking too much stress. I seriously recommend including a few needed sinking funds into your budget.