What Are Sinking Funds Categories and How to Use Them
Making a budget can help you build a solid financial foundation.
Ideally, you’re including a category for budgeting savings each month in case a financial emergency comes along. Because consider this: half of Americans don’t have an extra $250 to spare.
So including a line item for emergency savings in your budget matters. But you’ll also need to include sinking funds categories for other savings goals.
But what are sinking funds and how do you use them to budget and save money?
This article explains:
- What are sinking funds?
- How do sinking funds work?
- Sinking funds example
- How to set up sinking funds
Struggling to save money? Learn which sinking funds categories to include in your budget to save money and avoid financial surprises. And for a simple way to earn extra money to save, download the Ibotta app for easy cash back!
What Are Sinking Funds?
You may be wondering what is a sinking fund. And simply put, a sinking fund is a savings account you use to set aside money for a planned expense.
With an emergency fund, you’re saving money for those “just in case” times when you may need cash to cover a car repair or an unexpected doctor bill.
A sinking fund meaning is different.
These funds are designed to help you save money each month toward a specific expense or financial goal.
Using sinking funds categories in your budget requires planned saving for planned spending.
That’s a really simple sinking fund definition but these funds are so powerful because they encourage you to be intentional with your money.
Why is it called a sinking fund?
If you’ve never heard of them before, you might not understand the sinking fund meaning or why they’re called that.
Honestly, I didn’t know what a sinking fund was until a few years ago. But I’ve since learned that sinking funds are specific savings baskets where you collect money that you eventually plan to spend.
What are sinking funds examples?
To understand how sinking funds work, it helps to have an example.
So, say you pay your car insurance annually instead of monthly. Your annual premium comes to $1200.
Instead of waiting until the last minute to try and come up with the $1200 to pay the bill, you could set up a sinking fund instead. Then, you could put $100 a month into this sinking fund until you reach your $1200 goal.
Once you hit your savings target, you can take the money out to pay your car insurance. Then you can start saving $100 a month again toward the next premium.
Or here’s another sinking funds example of how you can use them for a one-time expense.
Say you want to renovate your kitchen and you’ll need $10,000 to complete the project.
You set up a sinking fund and save $500 a month toward your $10K goal. Once you reach your goal, you use the money to pay for the reno.
At that point, you can keep your sinking fund for home renovations in case you think you’ll do another project down the line. Or you can shift the money you were adding to it over to another sinking fund category.
What is the purpose of a sinking fund?
You might be wondering: why do I need sinking funds?
Sinking funds can save you from coming up short when there’s something you need to pay for that isn’t part of your regular budget.
And you don’t have to just use them for boring expenses, like paying bills. You can also use sinking funds to plan for fun things, like a family vacation.
Once you get in the habit of using sinking funds in your budget, it becomes a lot easier to:
- Manage your budget every month and avoid overspending.
- Get consistent with building a money-saving habit.
- Plan ahead for small and large expenses that aren’t part of your regular budget.
- Set and achieve specific financial goals.
- Make large purchases without triggering financial guilt or buyers’ remorse.
- Include “fun” purchases or spending without racking up debt.
So bottom line? Sinking funds can be a good thing for your budget.
Related post: 17 Dave Ramsey Tips That Can Help You Stop Being Broke
How to Use Sinking Funds Categories In Your Budget
If you’ve never used sinking funds before, then there’s a little bit of a learning curve to get started.
But don’t worry, it’s not overwhelming. Here’s how it works.
First, you choose your sinking funds categories. (I’ll walk you through which categories you may want to include in your budget a little later.)
Next, you’ll decide how much money you want to take save total for each category.
Then, you determine how much money you need to save each month to reach your target goal.
And finally, you review your budget to see how much you can afford to save each month.
How much should you have in a sinking fund?
The answer to this question can depend largely on two things: how many sinking funds categories you set up and how much you can commit to saving from your budget each month.
Here’s what a sinking funds example might look like if you have $500 a month to add to savings:
- $100/month for home improvement projects
- $100/month for a family vacation
- $100/month for holiday shopping
- $100/month for biannual car insurance premiums
- $50/month for kids’ activity fees
- $50/month for car repairs
At the end of the year, you’d have saved $6,000 altogether. You’d have
- $1,200 for home improvement projects
- $1,200 to spend on a family vacation
- $1,200 to spend for holiday gifts and other expenses
- $1,200 to cover your car insurance premiums
- $600 to put toward kids’ activity fees
- $600 in a car repair fund
Having those amounts saved in each of your sinking funds categories means that you have the money to pay for those expenses when the time comes.
Sinking funds vs. emergency fund
It’s important to know that sinking funds aren’t the same as your emergency fund.
Your emergency fund is just for emergencies, i.e. unplanned expenses you never saw coming. Or if you get laid off from your job or can’t work for some reason, then an emergency fund can help cover your day to day bills.
Sinking funds are not for that, unless of course you don’t have any emergency savings. In that case, you might have to dip into sinking funds while you work on building up rainy day reserves.
But otherwise, sinking funds are for preplanned expenses only.
Sinking funds vs. short- and long-term savings
Sinking funds and money you save for short- or long-term goals can sometimes be the same. But other times, they’re not.
For example, saving money for a down payment on a home could technically fit into either category. But saving money for retirement is most definitely a long-term savings goal.
A wedding is another example of what could either be considered a sinking fund, since it’s a one-time expense, or a short-term savings goal. But saving money so you can stay home with your kids once you start a family, on the other hand, is more of a long-term financial goal.
Understanding the differences between sinking funds vs. emergency funds and sinking funds vs. savings accounts can help you better plan out your savings strategy so none of your money goals fall through the cracks.
Related post: 10 Smart Money Habits That Can Make You Rich
Best place to keep sinking funds?
You could keep sinking funds in your checking account. But that can be a problem if you end up accidentally spending some of that money.
The better option is to keep sinking funds in a savings account.
There are a few ways you can do this.
First, you can set up one big sinking fund savings account that holds all the money for each goal you’re saving for.
That’s fine if you’re organized and can keep tabs on how much you’re saving toward each sinking fund expense each month.
The second option is to set up separate savings accounts for each sinking fund.
This is a good choice if you’d rather keep all of your sinking funds separate. Just remember to label each account through online banking or your bank’s mobile app so you know what’s what.
A third solution is to use subaccounts inside your savings account if your bank or credit union offers that option.
With subaccounts, you have one big savings account that you can break up into smaller accounts.
So say one of your sinking funds categories is house expenses. You could set up a house savings account, then set up subaccounts for things like home repairs, home improvements, property taxes, insurance, etc.
There’s no right or wrong way to do it, it all comes down to what works for you.
Just pay attention to the fees your bank charges for savings accounts and the APY you could earn. If you’ve got multiple savings accounts, it pays to get the best rate for the lowest fees.
And if you need a recommendation for sinking funds savings accounts, check out CIT Bank. They offer one of the best high yield savings account options around with minimal fees.
Sinking Funds Categories to Include In Your Budget
Okay, so now you know what sinking funds are and how they work. The next step is deciding which sinking funds categories you should have in your budget.
This step all comes down to what expenses you’re planning and what you want to save for. I find it helpful to start with broad categories, then break them down into individual categories.
Here are some sinking funds examples you can use to get started.
Home expenses sinking fund
If you own a home, housing is likely your biggest expense. So having a home expenses sinking fund is a must.
And within that sinking fund, you can include mini sinking funds for:
- Regular home maintenance (like getting your HVAC serviced twice a year or having the gutters cleaned)
- Home repairs
- Home improvement projects
- Property taxes and homeowners’ insurance if they’re not escrowed into your mortgage payment
- New furniture and/or appliances
- Landscaping/outdoor maintenance
- Pool maintenance (I have this in my budget)
- Gas/propane refills (I also have this one)
Vehicle sinking fund
Unless you take public transportation everywhere, chances are you have some vehicle-related expenses to cover. Some may be big, others might be small.
When setting up your vehicle sinking fund, consider adding these subcategories:
- Insurance premiums
- Car repairs
- Car maintenance
- Property taxes
- Registration fees
- Replacement tires/batteries
- Detailing and washing (if you don’t do this yourself)
- New-to-you savings fund for when you’re ready to upgrade or replace your vehicle
Kid expenses fund
If you’re a parent you know that having kids can be insanely expensive. So creating a separate kid expenses fund just makes sense.
Here are some of the smaller sinking funds you might include in your kid expenses sinking fund:
- Summer camp fees
- Daycare or childcare expenses during the summer if you work outside the home
- Sports activity fees
- Homeschool-related fees if you homeschool (for example, we have to pay an annual fee to our co-op along with field trip fees)
- Back to school expenses
- Private school or college tuition and fees
- Graduation or prom expenses if you have teens
- New baby expenses if you’re growing your family
Medical expenses sinking fund
Health care can knock your budget for a loop, especially if your insurance isn’t that great or you’re uninsured.
Setting up a medical expenses sinking fund is a smart move if you pay out of pocket for:
- Co-pays or deductibles
- Prescription drugs
- Over the counter medicines
- Medical equipment
- Dental visits
- Eyecare, including glasses or contact lenses
- Telehealth visits
Pet care fund
We have two dogs and a cat and I love them but man, does it cost money when they get sick.
If you have pets or you’re thinking of getting one, you could set up a pet care fund with mini sinking funds for:
- Routine vet check-ups
- Emergency vet care
- Prescription medications
- Spaying and neutering
- Pet-sitting or boarding services (I spend several hundred dollars a year to board our dogs when we go on vacation)
- Food and treats
- Pet toys
- Puppy pads if you’re potty training a new fur baby addition to the family
Holiday and birthday sinking funds
I started keeping a sinking fund for holidays and birthdays years ago after one particularly terrible Christmas when my husband and I had no money to buy gifts for our kids.
It was awful and I swore, never again.
Setting up a sinking fund for holidays and birthdays means you don’t have to worry about that. And you can add in sub-funds for:
- Holiday and birthday cards
- Holiday and birthday gifts
- Seasonal, birthday and holiday decorations
- Holiday or birthday-related travel (sometimes we take trips to celebrate my kids’ birthdays instead of having a party)
- Gift bags and gift wrap
- Holiday and birthday food spending
- Shipping and postage fees for mailing cards or gifts
Related post: How to Afford Christmas When You’re Totally Broke
We love to travel and take trips but we don’t love debt at my house so we have a sinking fund for travel.
Whether you like to see the world as a family or just plan staycations, you may want to add a travel fund to your budget. You can use it to save for things like:
- Passport fees if you travel internationally
- Car rentals
- Airfare and hotels
- Cruise tickets
- Souvenir spending
- Travel insurance
Self-employment sinking funds
If you work from home or your spouse is self-employed, there are certain expenses you may need to plan for outside of your regular budget.
For example, my self-employment sinking funds categories include:
- Estimated quarterly taxes
- Annual state and federal income taxes if I end up owing
- Laptop replacement (because I use my computer a LOT)
- Health-care sharing expenses (since we don’t have regular health insurance)
- Home office furniture and supplies
- Annual blogging-related expenses, like domain and hosting renewal and Tailwind for Pinterest
- Microsoft Office subscription
Personal care sinking funds
Personal care is important for managing your physical and emotional health, especially if you’re a busy mom who’s always stressing like me.
For example, you might set up personal care sinking funds for:
- Bimonthly haircuts
- Salon visits
- Spa visits
- Pedicures or manicures
- Annual gym membership fees
- Workout equipment if you’d rather exercise at home
- Weight loss programs (or get paid to lose weight with HealthyWage instead!)
- Beauty or grooming products
- Splurge items, like new clothes or electronics
Which sinking funds categories are in your budget?
Adding sinking funds to your budget can help you master saving money and never feel broke again.
Having sinking funds as part of your savings routine puts you in charge of your finances. So if you aren’t using them yet, you could be missing out on a simple way to improve your financial health.
And if you are putting sinking funds categories to work, which ones do you use?
Is there a sinking funds category I missed that belongs on the list?
Head to the comments and tell me about it. Then don’t forget to pin and share this post!