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.
So, what are sinking fund examples?
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.
Using these sinking fund categories will completely change your finances and help you to stay debt free.
What is a Sinking Fund?
The definition of a sinking fund is money set aside for a specific purpose.
In other words, paying yourself first to make a purchase rather than using a form of debt.
The most common type of sinking fund is an emergency fund. Money set aside just for emergencies.
There can be many types of sinking fund categories.
Another sinking fund example would be a vacation fund. For obvious reasons, those type of funds are just more fun to save for and plan vacations.
On the flip side, the car maintenance fund is a different sinking fund example. And well, just dreaded to save for and to use it.
The type of sinking fund categories all depend on your stage of life, your path to wealth, and what you desire in life.
Just remember, a sinking fund will help you to stay debt free!
Before you keep reading understand how sinking funds and the Money Bliss Steps to Financial Freedom will change your financial future forever.
Importance of Sinking Funds
By utilizing sinking funds, the living paycheck to paycheck cycle is broken. It is a way to ease stress. You are able to say ahead on bills and unexpected needs.
Thus, being easier to sleep at night.
The key to sinking funds is not to cross money between accounts. That means the home repair sinking fund can’t be used to pay the kid’s travel competitive soccer registration.
Don’t be tempted.
If not, there is no point to a sinking fund.
By utilizing one of the sinking fund examples, then the emergency expense does not pop up here and there.
It is easy to set up sinking funds when you learn how to make a budget.
Each month the same amount of money is allocated to the sinking funds. Take out the roller coaster effect of making ends meet.
Resource to help you succeed:
- Best Cash Envelopes – Find One to Work for You
- How to Overcome When Ends Don’t Meet
- 12 Painless Ways to Save Money on a Tight Budget
How Many Sinking Funds to Use?
That is completely up to you. Some people want a few sinking funds. Others want over 50 sinking funds. Decide what is best for you.
What can you manage? What areas do you need to sock extra money away?
At the minimal amount, I recommend at least five sinking funds, which we will cover shortly. These sinking funds would be held in separate bank accounts so that way you don’t intermix the money.
Specifically This is Number of Separate Bank Accounts You Need.
Shortly, we will get to the most common types of sinking funds.
When to Start Sinking Funds?
Wait to start any sinking funds until those steps are complete.
In Money Bliss Step 3, begin a few basic need-based sinking funds. Sinking fund examples would be car repairs or home repairs. Those items that would knock you off basics and eat up your emergency fund and cause more debt in your life.
After any debt is paid off, then you can begin fully funding a rainy day fund (always known as 3-6 months of expenses). That is the point you can start as many sinking funds as your heart desires.
So, basically, you need to make sure you are building a strong foundation with money first.
How Much Should be in A Sinking Fund?
Well, that depends.
Honestly, I hate that answer, too. But, everyone’s financial journey is unique just to them.
For instance, a car replacement fund would max between $15,000-30,0000 pending on what the car preference.
On the flip side, a clothing fund of $500 should suffice.
Sinking funds create choices. Choices open up financial freedom.
Is there some magical sinking fund formula?
No. It is all personal choice. Here is a good start to learn the ideal household percentages vs. your actual numbers. That can help you determine if you are saving more or less than average on certain sinking fund examples.
Quarterly or Yearly Sinking Funds
For those sinking funds that are yearly or quarterly, it is much easier to decide how much to save. These are sinking fund categories that aren’t the same amount each month. It varies by the month, quarter or year.
Sinking fund examples would be:
- Car registration or insurance
- Sewer bills
- Kid’s activities
If your car insurance is $1400 every 12 months, then you need to set aside $117 each month to pay the insurance premium in full. ($1,400 / 12 = $117)
Another example would be for kid activities. Throughout the year, you typically spend $4,000, but the payments aren’t monthly and happen for each sports season. So, each month, you would need to set aside $334 to cover kid’s activities ($4,000 / 12 = $334).
Key Note: If your bill is due before the 12 months, then you need to modify how much you set aside. For example, if you car insurance is due in 8 months. Then you would take $1400 divided by 8 and need to set aside $175 each month to pay the insurance premium in full. ($1,400 / 8 = $175)
Just remember a sinking fund is money saved by you for a future decision.
how to organize sinking funds Money?
A couple of different options to choose from depending on your preference.
It is okay to have multiple savings accounts for sinking funds. Yes! We do!
Why? Because it is easier to know how much money is allocated to what fund.
A terrific option is a high interest online savings account. The key is to set it up and don’t delay.
Once an account balance is higher than $10,000, look into an investment account for the excess. Yes, there is risk, but there is also a possibility of higher returns.
Understand: The Best Methods of Budgeting You Need to Know
Sinking Fund Examples:
- Car Service / Repair
- Auto Registration
- Home Maintenance / Repair
- Medical Expenses
- Education Expenses
- Replace Furniture & Electronics
- Vacation / Travel
- Kid’s Activities
- School Tuition
- Pet Needs
- Baby / stork fund
- Property Taxes
- Misc Utilities (sewer, trash)
- Association Dues
- Babysitting Money
- Just Because Money
- Income Tax
The list for sinking fund examples could go on and on.
The Oh No Fund!
This is the last sinking fund example we are going to talk about today. It is the Everything-Lumped-Together-And-Hope-Nothing-Happens-Fund.
This is what makes the sinking fund formula work.
This time of fund is for people who just don’t want to keep track of a bunch of accounts, live within their means, and want simplicity.
The Oh No Fund!
It is a simplistic way to cover the next thing that is guaranteed to be replaced. It may be a car, a home repair, or home improvements. Who knows! But, your oh no fund will have you covered.
What About Retirement?
Personally, I don’t like to think of retirement as a sinking fund. Even through, technically, it is.
This is a long term saving goal. That needs to be added to on a consistent basis. Don’t wait to start saving for retirement. Start today with just 10-15% of your income.
The same is true for college tuition. However, should parents pay for college? That brings up a whole new level of questions and thoughts.
As for Health Saving Accounts (HSAs), the same principle holds true. They needed to be treated as a long term saving account. Money that is consistently added to your HSA each and every year.
Oh, and you don’t want to learn what happens when you don’t save for retirement.
Which Sinking Fund Categories will You Use?
All in all, sinking funds will improve your budget.
Each of the sinking fund categories that you decide to use means you have set money aside for that certain purchase.
For our household personally, we use the following sinking funds:
- Property Taxes
- Kid’s Activities
- Auto Insurance and Registration (we lump them together)
- And don’t forget the Oh My Fund!
There is no wrong or right answer on the number of sinking fund categories. You need to do what works best for you and your budget.
Sinking funds will change your financial situation immensely.
So, start off with one or two types of sinking funds, then start adding from there.
What are your favorite sinking funds? Which are the most important in your household?