Sinking Funds for Budgeting: How to Prepare for Irregular Expenses
You took hours on your spreadsheet and finally created your perfect budget. But you may have forgotten just one thing…
Sinking funds!
Having the right sinking funds is the secret to staying on top of your budget and afford buying anything you want!
What Are Sinking Funds?
A sinking fund is a budgeting strategy where you set aside money over time for future expenses.
It’s a process where you budget a little bit each month into your sinking fund so you have the full amount ready when the expenses come due. Sinking funds help make budgeting easier, avoid getting caught short, and reduce financial stress.
In corporate terms (Investopedia), sinking funds help to “soften the hardship of a large outlay of revenue.”
If you know you’re going to have a large one-time expense coming up, you should plan to create a sinking fund. They provide a simple but powerful way to gain greater control over your money.
Sinking Funds vs Emergency Funds?
Yes, you do. And here’s why.
An emergency fund is money set aside for unforeseen circumstances, like job loss, medical emergencies, or home repairs. On the other hand, a sinking fund is for known, irregular expenses, an emergency fund is for unexpected costs.
You want to save your emergency funds for true emergencies.
If you know an expense is coming up, sinking funds allow you to plan ahead for these one-time expenses and feel guilt free. You’ll feel so much better when you’re spending your pre-planned vacation sinking fund on your dream trip instead of using your emergency fund.
How Sinking Funds Work
Decide how much money you need to save and how long you have until you need to pay the bill. Then, divide the total amount by the number of months to determine how much to set aside each month.
For example, if you need $1,200 for car insurance in six months, save $200 per month.
Automate transfers to make saving easy. As the months go by, the money in your sinking fund accumulates so you have the full amount ready when it’s time to pay. You’ve already saved it without having to adjust your budget. No need to scramble to find the money or rely on credit cards.
Irregular Expenses to Save For
Essential sinking funds that everyone should have include:
- Home repairs fund
- Car repairs and maintenance fund
- Medical fund
- Vacation fund
- Holiday gifts fund
- Fun experiences fund (for spontaneous trips)
- Taxes fund (property taxes or freelancing taxes)
Any expense that does not occur monthly is a good candidate for a sinking fund. That way you have the cash ready when you need it instead of paying interest on a credit card or going into debt.
Sinking Funds Reduce Financial Stress
Not worrying about how you’ll pay for unexpected expenses reduces stress and gives you greater financial security.
Just this past week, I had to pay +$600 when my car got towed.
If I hadn’t prepared a sinking fund for the car, I would have been a lot more stressed and panicked as I may have had to dip into my emergency funds to make the payment.
Sinking funds provide peace of mind that the money will be there when you need it. You can budget more easily when you know how much to allocate to your sinking funds each month.
There are no surprises disrupting your budget since you’ve already saved the money. You gain control over irregular expenses instead of them controlling you. There’s less temptation to rely on credit cards or loans when you have a sinking fund established.
Get Started Today
Sinking funds are easy to set up and provide significant benefits.
- Decide what irregular expenses you want to save for
- Estimate the amounts needed to save for
- Divide by the number of months to save
- Set up automatic transfers to make saving simple.
By following these steps you’ll gain confidence in your budget, reduce financial stress, and avoid debt. Sinking funds provide stability so you can meet future obligations without worry.
Start setting aside money each month for your irregular expenses and enjoy greater financial security.
