In sharing our financial stories and advice, Maria and I get one question over and over again: “What are sinking funds?” We've talked about saving money before in a general way, but we haven't really discussed many of the specifics about sinking funds. Well, get out your pen and paper, because this post is all about what these funds are, which funds are included in our monthly budget and how we use them.
What Are Sinking Funds?
Let's start with the basics: what the heck is a sinking fund? The phrase “sinking fund” is a fancy economics term for saving up for an expense. That’s it. Ever saved up to buy something? Then you’ve created a sinking fund. Maria and I share one personal checking account and one personal savings account. Within that savings account, we have money set aside in subcategories for all sorts of purposes: saving for a new car, saving for a down payment on a house, saving for our Costco membership renewal… the list goes on and on. Each of those little subcategories is a sinking fund and we use a spreadsheet to keep track of them on our computer. (We will show you how in this post, too.)
Why We Love Sinking Funds
Of all the things I learned in Financial Peace University, I especially love sinking funds. I still remember the first monthly budget I did back in summer of 2014. At the end of that first month, when I actually started putting money into my savings account for designated purposes, the feeling of empowerment was overwhelming. I felt like I had taken control of my finances rather than my bills dictating what I did with my money. Which is why I am so happy to sing the praises of these savings funds to you.
Sinking funds are one of Dave Ramsey’s (and thus Maria and my) favorite ways to plan your budget for the long term. They are great for expenses that are predictable, but don’t come up every month. A good example is our water and sewer bill, which comes once every three months. Or annual membership dues that you pay only once a year. Things like that are perfect for sinking funds.
The real advantage of sinking funds is that it spreads out your big expenses over a lot more time. Let's take one easy example: an Amazon Prime membership. I'm sure lots of you are Amazon Prime members. We are; we adore it. But it costs you $99 per year. You could just take that $99 out of your budget in the month that your Amazon Prime renews, but it's kind of a big hit and something else in your budget will have to be significantly reduced. Or, with a little planning, you could save $8.25 per month for 12 months in a sinking fund for your Amazon Prime. That way, the cost is spread out over the entire year rather than hitting your budget really hard in one month.
What Sinking Funds Do You Have?
Along with “What are sinking funds?”, another question we get a lot is “What sinking funds do you have?” I'm not going to lie: Maria and I have quite a few items that we are saving for and we are always adding more. Basically, if we have a predictable, recurring expense, we have a savings fund for it.
Here’s a list of the sinking funds Maria and I have right now:
There are a whole lot of other sinking funds you could have in your own budget. Maria and I are renting right now, so we don't have any home appliances like a washer, dryer, refrigerator or dishwasher. If you own your own appliances, replacement appliances are prime targets for a sinking fund. You could also begin saving for replacement computers, major home repairs (like the roof or new carpeting), and new furniture. Heck, I'm even saving up for a new suit for work because it hurts our monthly budget too much to invest in a nice suit with only one month's income. Pretty much any expense you can think of can be a sinking fund.
How Do You Use Sinking Funds?
Okay, so you know which of your expenses to set up a savings for, but now you're asking, “how do I use my sinking funds?” The answer is super-simple: you put the money in your savings account and keep track on a spreadsheet of how much money is in each fund. For example, if you have $2,000 in your savings account, $1,000 of that might be for your emergency fund (which, by the by, is not a sinking fund), another $500 might be for vacations, another $300 might be for your car repairs, and another $200 might be your new car savings. So you have $2,000 in your account, but you keep track of what each dollar is for in a separate piece of paper or file.
Every month, we estimate the expected expense from each sinking fund as best we can and then calculate the amount we need to save per month to save that amount. Like, we know our Amazon Prime membership will be $99 and we pay it annually, so we divide it by 12 to get $8.25. And that's what we save every month for our Amazon Prime sinking fund. By the time the expense comes up, we should have enough saved to pay for it. When the expense occurs, we just transfer that money from our savings account to our checking account.
Our smallest sinking fund? The renewal fee for Maria's teaching certificate. It gets renewed every 3 years and costs $160. It's not a big fee, but we don't want to scrimp on our budget when her certificate expires this June. It's a lot less painful to save a little over $4 each month in anticipation of the expense.
Why Your Budget Needs to Use Sinking Funds
It takes a few extra minutes to update and maintain our savings spreadsheet each month, but the peace of mind is worth the extra effort. Our best examples are our automotive savings. We currently have a little over $900 set aside for car repairs. Car problems are often one of the most painful blows to personal finances. Maria recently had to replace the shocks and a few other items on her car. Because we had plenty saved in our car repairs fund, we just got it done, no stress. When one of our cars unexpectedly breaks down, it's a really great feeling to just write a check and forget about it. There is no worrying about how we will pay for the necessary repairs.
We haven't needed to replace a car as a married couple yet, but Maria saved up for her current car and paid cash at the dealership a few years ago. As soon as her previous car loan was paid off, she just started saving a few hundred dollars each month toward her new car sinking fund. Maria will be the first to admit that she's a terrible haggler (she's way too much of a people pleaser,) but buying a car was easy because every time the salesman at the dealership tried to give her an upsell, she insisted that she had to stay at a certain dollar limit because that was ALL SHE HAD. It's a lot easier to stand firm when you have your sinking fund savings as the line in the sand when you go to purchase a new car.
Likewise, Christmas wasn't painful for us at all this year. We set money aside for gifts all year long in anticipation of Christmas shopping. When shopping season arrived, we just bought our presents and paid for them out of our gift sinking fund without affecting any of our other spending like food money or groceries. And we definitely didn't have to put ourselves back into debt by charging those gifts to a credit card.
It may sound crazy, but we really look forward to the day when we settle our budget from the previous month and transfer all of our allotted budget income into the appropriate sinking funds. Money is pretty powerful when you make it work for you.
Download a Free Sinking Fund Sheet
Maria and I keep track of our sinking funds in a spreadsheet right along with our monthly budget. If you're looking to start keeping track of your own sinking funds, we are giving away a copy of the spreadsheet we use to keep track of our sinking funds. It's the perfect way for you to start your sinking funds and avoid those big hits to your monthly budget when a big, but predictable expense comes up.
Thanks to the very talented Brian Weitzel from BTW Photography for snapping the photos in today's blog post!