7 Crucial Sinking Funds Every Budget Should Include

How many sinking funds categories do you currently save for? If you’ve been budgeting for a while, you probably know all about sinking funds and why they’re such an important component of a budget, but are your sinking funds actually protecting your budget when you need them to?

What is a Sinking Fund Budget?

Basically, a sinking fund is just a pool of money you save to cover an expense you expect will occur sometime in the near future. Sometimes you know exactly when that expense will occur and what it will cost – as in your annual car insurance premiums, which are due at the same time every year.

Sometimes you have no idea what is coming – or how much money it will cost – but you have a reasonable expectation it will happen at some point, and you want to be prepared so you don’t have to accrue debt to cover these unplanned expenses.

Do You Need to Use Sinking Funds if You’re Already Budgeting?

Sinking funds don’t replace your budget – they support it. Your budget, emergency funds, and sinking funds work together as a powerful financial team to ensure you’re prepared for anything that may come your way and allow you to avoid debt in any circumstance.

If you don’t have sinking funds and incur an expense you can’t afford to pay for with your regular income you’ll take the money from your emergency fund, you’ll have to skip paying something else or you’ll have to use some form of debt to pay for the expense.

Is There Another Option?

Yes, creating and maintaining sinking funds in various categories gives you an extra source of money you can pull from to pay for specific expenses when they occur, allowing you to keep all of the other items in your budget untouched and intact!

What is the Difference Between an Emergency Fund and a Sinking Fund?

The terms “emergency fund” and “sinking fund” are often used interchangeably, but they are not the same thing. Remember, sinking funds are used to prepare for upcoming expenses that will occur at some point in the future, like planning ahead for irregular bills or big purchases.

An emergency fund is used to prepare for expenses you don’t know will occur. While you can be certain emergencies will happen – how, when, where, and how much they will cost are completely unknown. Your emergency fund should be equal to anywhere from three to six months of expenses and has no purpose other than to hang out in a separate savings account in case of an emergency.

Sinking Funds Categories

Because we all have different financial needs and different budgets, we likely have different amounts and types of sinking funds as well. Having more sinking funds can minimize borrowing from other sinking funds (or your emergency fund) to cover an unexpected expense.

Here are seven essential sinking funds you should consider including in your budget – if they are applicable to you, it’s likely they represent an essential part of your life and your budget and should be included.

Christmas Fund

There is nothing worse than working hard on your finances all year long only to have the holiday season roll around and have to pay for all your Christmas gifts with a credit card because you have no extra money. You didn’t prepare for it…as if it doesn’t come on the exact same day every. single. year.

Determine the total amount of money you’ll need to pay for the holidays and stash some money in your Christmas sinking fund throughout the year. By the time you’re ready to begin your holiday shopping, you’ll have the money you need to cover the big bill!

Home Fund

If you’re a homeowner (or a renter who is responsible for home maintenance), you know how quickly you can burn through your savings when big expenses like home repairs need to be done. Another good idea would be to create separate savings where you can save a small amount of money each month to prepare for large expenses down the road, such as a new roof. It’s possible your roof may be in decent condition, but you know within the next 10 years, or so you will want to replace it.

Instead of allowing the need for a new roof to surprise you one day and eat into your emergency savings, preparing in this long-term manner will allow you to save for future expenses way in advance. This strategic way of saving will allow you to put away a little bit of money each month without much impact on your financial health.

Kids Fund

Keeping a specific sinking fund just for your child-related expenses won’t make them any less expensive, but it will help you be more prepared when they’re nickel and dime-ing you to death.

From book fairs to field trip slips brought home the night before, this category has come in handy more than you know.

Medical Fund

If there’s one thing that can quickly derail your financial goals, it’s medical expenses. A medical sinking fund is your weapon against random illnesses…that inevitably spread to the whole family.

It will also have your back when you get prescribed an expensive (yet, necessary) medication and are charged costly co-pays. This is a good category to prioritize, especially if your medical insurance is less than stellar.

Pets Fund

We sure do love our furry friends, but they are notorious for costing a pretty penny. Yet, of course, we want to do everything we can to keep them healthy, but sometimes our budgets just don’t have enough margin to come up with a few hundred – or thousand – dollars when Fido decides he wants to chow down on a plant that doesn’t sit well with him.

This is exactly why if you’re a pet owner of any kind, you need to have a pet sinking fund. This fund will ensure you’ll never have to choose between paying the pet expense to save your kitten’s life or making your rent payment!

Vacation Fund

Not all vacations have to wipe out your entire savings account, but why use your regular savings account to fuel your wanderlust?

Just start a vacation sinking fund, and by the time you book an epic family vacation, you may even have enough money in there to fund the entire trip or at least some extra spending money to take along for excursions and other fun things to do!

Vehicles Fund

Last but definitely not least is a vehicle sinking fund…this one is also very important. You may be driving Ole’ Faithful around town, but it’s inevitable that at some point, you will need to fund some car repairs or, at the very least, regular maintenance, such as new tires and oil changes to keep your car running as efficiently as possible.

Unless you’re an experienced mechanic, chances are you’ll have to foot a decent-sized bill. Imagine how good it would feel to have the money you need sitting around in a sinking fund, just waiting for the day you need to use it!

How To Organize Your Sinking Funds

You can keep a notebook and track one sinking fund per page, record them on a sheet of plain paper, or use your favorite budgeting app to organize your sinking funds.

If you’re using sinking funds to save for long-term goals such as a new car or a down payment on a home, you may want to consider keeping them in their own separate sinking funds instead of mixing them with the vehicle and/or home maintenance funds for simplicity. Find a way that feels easy and convenient to you, or you won’t do it…

Where To Keep Your Sinking Funds

Your sinking funds can be kept anywhere that is separate from your main checking account.

A high-yield savings or checking accounts (depending on how often you may need to use the fund) or even cash envelopes if you prefer your sinking funds more liquid.

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