This post may contains affiliate links, which means I receive a small commission at no cost to you. Please read the full disclosure here.Sinking funds are money set aside for a specific purpose. By using a sinking fund, the avoidance of having a money emergency goes away. Typically, these funds are expenses that randomly pop up or expenses that are paid on a quarterly or yearly basis.
Need new tires? Taken care of with car service fund. Want to take a vacation? Taken care of with vacation fund. Need to go to the vet? Taken care of with pet needs fund. Then, you can leave your emergency fund – just for an unexpected, out-of-the-blue, knock-over-expense.
Sinking Fund Examples:
- Car Service / Repair / Auto Registration
- Home Maintenance / Repair
- Medical Expenses
- Education Expenses
- Replace Furniture & Electronics
- Kid's Activities
- Pet Needs
- Baby / stork fund
- Property Taxes
- Misc Utilities (sewer, trash)
- Association Dues
- Babysitting Money
- Income Tax
By utilizing sinking funds, then an emergency expense does not pop up here and there. It is easy to set up sinking funds in your Cents Plan. Each month the same amount of money is allocated to the sinking funds. Take out the roller coaster effect of making ends meet.
Understand: Cents Plan Formula
How many sinking funds to use? That is completely up to you.
When in Money Bliss Step 1 and 2, focus on getting organized and establishing an emergency fund. Wait to start any sinking funds! In Money Bliss Step 3, begin a few basic need-based sinking funds. After Money Step 4 of a fully funded rainy day fund, start as many sinking funds as your heart desires.
Where to keep the money for sinking funds? Check this out: Where to Save Money (Better Options Than Under the Bed).
A couple of different options to choose from. Those include a separate saving account or a cash envelope. If you utilize primarily cash, I highly recommend a hiding place like this or this. It is okay to have multiple savings accounts for sinking funds. We do! Why? Because it is easier to know how much money is allocated to what fund. One of my favorite online banks – CiT-Bank.
What are your favorite sinking funds? Which are the most important in your household?