If you want to build the best budget possible you need to check out these sinking funds categories

Budgeting is kind of a gateway drug, but this happens to be the good kind of drug (if there is such a thing); it’s the responsibility drug. Once you nail budgeting and see the freedom it brings (emotional and physical), you will want to keep it going to keep that feeling of achievement & security going!

The next natural step after budgeting is saving money. This could be filling your emergency savings (this is a must-have) and saving for things you want. Notice I said things you “want”; this is the main distinction between budgeting and saving.

Budgeting = spending plan for what you need soon

Saving = setting money aside for what you want/need later

One of the very best ways to save money is using sinking funds, and I can say that without a doubt that sinking funds have been the key to the success of my family’s finances! It has allowed me to buy my family everything that we need and much of what we want!

Let’s go through a list of sinking funds categories so you can see how you can build the best budget possible and live consistently debt-free!

how to save money like a pro with these sinking fund categories

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What are sinking funds?

A sinking fund account is basically a way to prepay for the things that you need/want, a mini savings account so to say. You are planning ahead, which is one of the key budgeting skills that you need to succeed with your personal finances!

Here’s a sinking fund example, a planned expense could be Easter baskets & candy for your kiddos. You can use money from your regular monthly budget, but you know it’s pretty tight already, and you don’t want to put it on a credit card. Or you can save $10 every month for it (starting in January) and set it aside.

Hmmm…. setting aside $10 a month sounds doable, so you set up an Easter sinking fund. Easy peasy lemon squeezy!

Why do people use sinking funds?

Effectively using sinking funds keeps you out of debt because you don’t need to put a purchase on your credit card (and potentially rack up high interest rate debt); that’s the main reason people use them, and it’s a dang good reason! You know that you will need new tires for your car at some point, and then again in a few years. There’s no reason you should go into debt just because you didn’t map out your planned expenses. That’s silly!

Don’t be silly!

Sinking funds also give you something to look forward to! Hello Bora Bora vacation! Yes, it may take you years to save, but each and every month you put $50 into that savings account it gets closer and closer! You are moving forward on your dreams & goals, and that feeling is hard to beat!

Where do you keep your sinking fund money?

Depending on the fund, you can keep it in one of two places. In a separate account or in a cash envelope. The main thing that you MUST DO is keep your savings separated from your general money.

Most people have a checking account and then a separate savings account. I don’t have my money set up that way. We have the main checking account, then four separate checking accounts for our sinking funds, a regular savings account (as I opened it when I was 16), and then a high yield savings account for our emergency fund, as well as a few cash envelopes for one-offs.

I’d like to think that I’m pretty smart that I keep track of everything! But it’s not true. I forget things, sometimes I confuse myself, and sometimes I am just plain dumb (hello math errors)! I know this, and I accept it. How many times have you accidentally spent the water bill money on a dollar spot binge at Target? Uh-huh, it happens to all of us ?

So I separate my money and label things accordingly so that there is no confusion about what the money is for. I use checking accounts for my permanent sinking funds, and for one-off sinking funds (i.e. my Christmas sinking fund), I use cash envelopes. They work so well that I have a bunch of different styles for whatever you need, just print, cut, and tape and you’re all set to save money!

saving money quote from john soforic

Sinking Fund Examples

Long term sinking funds examples include…

  • Down payment for a home (this is a really large dolalr amount so it will take awhile to acheive)
  • New car fund
  • Vacation fund
  • Kiddo fund

These are what I call revolving sinking funds, as every month money goes in, and usually, some money comes out when I pay my bills. These savings accounts are never empty and they’re never full.

Short term sinking funds include…

Sinking funds can also be revolving, or they can be a one & done. For example, a holiday-type sinking fund is a one & done (although you may do it every year). Once you spend the money on Halloween candy & costumes, it’s done, you stop saving money for it.

But a revolving sinking fund could be a home repair sinking fund. Money flows in and out of it every month, the account never gets “full,” and it never gets empty (hopefully).

Let’s say each month you put $40 in the home repair fund, then in February you need a new dishwasher, out goes $400. Then in March, you need paint to go over all the scuffed up baseboards in the house, so out comes $40 for paint & brushes.

How is a sinking fund category different from a budget category?

You might think that these categories are similar to budget categories as a monthly expense and there is some overlap.

A budget category expense is you planning on a specific expense in an immediate time period. For example, your budget category is transportation, the line item in that category is your monthly bus pass, and it costs $32. While a sinking fund category can be…

  • for an unexpected expense of an unspecified amount, at an unknown time, such as a home repair fund.
  • A planned expense coming up in a longer time period, such as a vacation.

How is a sinking fund different than an emergency fund?

So this is a complicated question, as everyone thinks of emergencies differently. In essence, a broken water heater is a cause for an “emergency”. So you should be able to use your emergency savings fund for this. However, I (and some others) view an emergency fund differently.

In our household, our emergency fund is strictly for the use of replacing our income if my husband was out of work. Then that emergency fund would be used to pay our regular monthly expenses.

While a broken water heater is something that needs to be fixed/replaced immediately. You knew at some point it would break, and need to be fixed. Just like your car will need new tires, it’s a known expense. It’s the timing of the upcoming expense and the extent of the cost that is the unknown.

The main point being, that when you create your emergency fund, you get very black & white about what that money is for, and what it cannot be spent on.

How do you set up a sinking fund?

  1. Decide if it’s a permanent/revolving sinking fund or a short term (one and done sinking fund)
    • If a permanent fund then open a seperate savings account for it
    • If a short term sinking fund use a cash envelope
  2. Decide how much money a month you’ll put into it
    1. If it’s a permanent fund, tally up how much a month you usually spend on this category, then strive to match that amount. Or you can start with a straight $20 or $50 a month depending on how costly it is if you want to keep it simple.
    2. If it’s a one and done sinking fund (i.e. Halloween stuff), then figure out a total budget for the items (i.e. costumes, candy, decorations, treat baking, etc), and then take that total and divide it by the number of months until you need to spend it.
  3. Decide how you will contribute to the fund
    • If permanent, then set up an automatic transfer of the amount for a few days after your payday. This way you’ll always have money in the account for this financial goal.
    • If short term, set a calendar reminder of when you’ll pull money from your bank account and stuff your cash envelope. To help you keep track and organize it all, be sure to check out the Sinking Funds Simplified Workbook to make everything flow seamlessly! It’s a sinking fund tracker, a planner, and a brainstorm helper all rolled into one workbook.
  4. How to spend your money
    • If a permanent sinking fund, when paying your bills at the end of the month, track on your credit card statement (or go through your receipts) and tally up how much you spent on purchases within that sinking fund category. Then transfer that amount from your sinking fund savings account into your regular bank account and pay your bill from there.
    • If short term, then just spend your cash.

28 sinking funds categories

Now that you have the gist of what sinking funds are and why they’re so important, you can start brainstorming your own. Here is a list of some of the most common sinking funds categories.

Sinking Funds categories for the home

  • home repairs
  • home remodels
  • new furniture
  • new landscaping
  • pet care
  • car maintenance
  • emergency fund

Sinking Funds for the family

  • new vehicle sinking fund
  • vacations
  • backyard plusing – pool, swing set, patio set, etc
  • entertainment – festivals, day trips, gaming system, etc
  • annual & monthly memberships – zoo, gardens, aquarium, etc.
  • medical expenses

Sinking funds for your kids

  • camps & lessons – sports, hobby, etc
  • hobby stuff
  • new school clothes
  • birthday party & presents
  • school activities

Sinking Funds for you

  • new wardrobe
  • membership & clubs
  • lessons
  • self-care – day spa, therapy, nails, etc
  • hobby supplies
  • date night with sweetie pie 🙂

Holiday sinking funds categories

  • New Year’s Eve party
  • Valentine’s Day date/candy/present
  • Easter outfit, basket, and candy
  • Memorial Day & Labor Day weekend BBQs
  • 4th of July picnic & fireworks
  • Halloween costumes and candy
  • Thanksgiving dinner
  • Christmas sinking fund- presents, food, family fun, events

The sinking funds every family should have

Even though sinking funds are an optional financial step, there are a few funds that have enabled my home to run so much smoother. They have turned significant financial obligations into a minor inconvenience. For example, my husband’s car needed $1,400 worth of work done. Sure it was a bummer to spend it, but we had the money just for this purpose. But if we hadn’t had the money, we’d have to scramble to come up with it, which would be very stressful.

At the very least, you should have five sinking funds…

  • Home repair fund – things break all the time. Dishwasher, more insulation in your attic, a new dinner table, etc.
  • Car repair fund – oil changes, new tires, registration & DEQ testing, plus repairs
  • Medical sinking fund – prescriptions, co-pays, deductibles, extras such as orthodontics, glasses, etc.
  • Vacation fund – weekend trips to the beach, an afternoon adventuring in a new town, palm trees & sandy beaches. (I always need a vacation to look forward to, even if it’s 18 months away, I still get excited.)
  • Christmas sinking funds – we know that Christmas is coming every year so why don’t we take the stress out of it and plan ahead! On January 1st, I start a new holiday cash envelope and each week I add $20 to it – simple and easy.

The problem with sinking funds

Firstly, if you haven’t guessed, I LOVE sinking funds! They have made my debt-free life possible! But there can be too much of a good thing. As with everything in life, moderation is key.

Sometimes people get so excited about sinking funds that they set up 57 different sinking funds, each for a small tiny thing. That’s too complicated; you don’t need a separate fund for “vacation transportation,” and for “vacation tickets,” “vacation food.” Just a general “vacation” sinking fund will do along with a vacation budget planner to help you itemize expenses.

When you have too many sinking funds, you are spreading your money out pretty thin, so it will take you longer to reach your goals. Sometimes you need to space out your savings. For example, in January, you start a Valentine’s Day fund, and then once that holiday is over, you can start saving for summer vacations, and then when that has happened, you can save for Halloween stuff. It’s all about strategy!

Resources for setting up your sinking funds

In essence, all you need to start using sinking funds is paper, a pencil, and some money. But some things can make it a lot easier (and faster) to get up and running. I made my Sinking Funds Simplified workbook for exactly this reason. It walks you through the entire process from start to finish!

The workbook includes…

  • guide on how to review last year’s spending to plan ahead for this year
  • year at a glance guide
  • sinking fund brainstorm session
  • sinking fund tracker and more!

Or you can grab just a simple funds tracker.

sinking fund simplified workbook mock up

If you’re looking to save a specific amount of money for something, be sure to check out Savings Charts for Supercharging Your Money Stash. There are some fun ideas for how to track your progress towards your money goal!

At the end of the day

Using sinking funds is a fantastic way to step up your budgeting game! You know you’re going to spend money on this general “thing,” so planning for it and saving for it now spreads the cost out and makes it much more manageable.

I mean, would you rather save $10 every month for something or get faced with an unexpected $120 bill for something? $10 is a lot easier to fit into your budget, and that’s why sinking funds keep us debt-free and working towards our big savings goal!

free saving money printables

Which sinking fund categories are you going to add to your budget?