When I first started budgeting, sticking to my monthly spending amount was tough.
I’d start the month thinking I had a great budget and would only spend a certain amount. But by mid-month, I’d fall off track. Car insurance was due! I needed to buy a birthday gift for my Mom! Things that I needed to pay for were constantly catching me by surprise. As a result, I’d blow my budget more often than not.
The frustrating part was that I had failed to plan for known expenses.
After my many failed budgeting attempts, I heard about a sinking fund, a type of savings account that you use to set aside money to save for something in the future. I immediately began using a sinking fund for a couple of things, and eventually began using it to automatically save for just about everything.
Not only has a sinking fund helped me stop blowing through my budget each month, but it’s also helped me become more thoughtful and proactive with how I spend and save my money.
What is a sinking fund?
A sinking fund lets you set aside a little bit of money each month to help prepare you for an expense. Sinking funds can be used for things like: Christmas presents, travel, a new car, or an irregular bill.
Some examples of uses for sinking funds:
- Attending weddings
- Buying a new car
- Paying insurance bills
- Making property tax payments
When you’re transferring a little bit of money into a sinking account monthly, you’re prepared for times when you have to make the bigger cash outlays.
Why is a sinking fund important?
No matter how well you plan out your monthly expenses, if you’re not factoring in known, irregular expenses, you’ll be totally unprepared when you’ve got to come up with the cash. This can leave you reaching for your credit card every year at Christmas and starting off the New Year in debt. The average American racks up over $1,000 in debt during the holidays.
But what if you were able to set aside $50, $75, or $100 each month to save for the holidays? You’re now suddenly much more in control of your spending and not risking your financial health to buy presents.
Aside from helping you prepare for things like excess holiday spending, a sinking fund can help you dream big when it comes to your money goals. Want to buy a new car and pay cash? Want to take your family on a special and memorable summer vacation? A sinking fund can help you do these things.
Sinking fund vs emergency fund: what’s the difference?
If you put money into an emergency fund, you might wonder if that’s really different than setting aside money in a sinking fund account. Yes, it is! Money in an emergency fund is to be used for emergencies only — like your car breaking down or losing your job. It’s a bad habit to withdraw money from your emergency fund for non-emergencies. When a real emergency strikes, you’ll be happy to have that cash set aside.
Money in a sinking fund is used for known expenses like car insurance, vacations, or holiday gifts. You can spend that money without worry or guilt because you’ve planned and saved for it.
Sinking fund examples
How does this actually work? Let’s say you have three things that you’ve decided to save for with a sinking fund: car insurance, Christmas gifts, and summer vacation.
For each expense, list out how much it will cost and when you’ll need the money:
- Car insurance: $600 bill due in six months
- Christmas gifts: $750 saved in three months
- Summer vacation: $1,200 saved in 10 months
Next, break each expense into the monthly amount you need to save:
- Car insurance: $100 per month
- Christmas gifts: $250 per month
- Summer vacation: $120 per month
Once you have that calculated, include those expenses in your monthly budget and set up a monthly automatic transfer to your sinking fund.
How to create your own sinking fund
You’re hopefully now sold on how great a sinking fund is. And it gets even better because it’s easy to start your own sinking fund. Here are the steps you’ll want to take:
- Open a bank account specifically for your sinking fund. You’ll want to keep this money separate from your other accounts so you know exactly how much you have available to spend.
- Make a list of all the things you want and need to save for, as well as how much they cost. Think about things you have to pay for (taxes, insurance) and the things you’re excited to spend money on (vacations, a new car, holiday spending).
- For each item, figure out the date when you’ll need the money.
- Calculate how much you need to save each month to have enough saved by the time you need it.
- Set up monthly automatic transfers to move money into your sinking fund account. And yes, you really do need to make these transfers automatic.
Are you ready to start a sinking fund?
If you find yourself constantly unprepared when irregular expenses pop up and reaching for your credit card, it’s time to start a sinking fund.
While it’s a little extra work up front to set up your transfers, it’s worth it in the long run. To start your sinking fund, check out the Chime app that makes mobile banking easier. And you can use the automatic savings feature to reach your sinking fund goals even faster.
Now that you know how to get started, what are you excited to save for?