Have you ever tried to make a budget and then something goes wrong? Maybe your car breaks down or needs new tires. Or your child was invited to a friend’s birthday party and you forgot to budget for a present. Even worse, your taxes went up and now you have to either pay a lump sum to your mortgage lender or increase your monthly payment each month for the next year! Unfortunately, things like this will happen. It’s life and things won’t always go as planned. This is why it’s so important to have sinking funds in place to help with these costs. It helps save your sanity when life throws you curve balls!
What is a sinking fund?
A sinking fund is when you intentionally set aside money for upcoming events or payments. For instance, we all know that cars don’t last forever. Eventually, you’ll need new tires, oil changes, or even the sporadic large expense such as new brakes. Because you are expecting these types of costs in the future, you can set up a sinking fund to help with these future costs. Put as much (or as little) money each month into your sinking fund. When the inevitable happens, you have money saved for that specific situation. It takes the burden off paying for that expense out of your monthly budget. It also keeps you from putting the expense on a credit card!
Where to keep your sinking funds
I recommend keeping your sinking fund in one of two places: either your savings account or in cash envelopes in your house. It all depends on what type of sinking fund you have. We currently budget $100 a month to go to our car maintenance sinking fund. If you know that your property taxes will increase and you’ll need to pay extra money at the beginning of the year, you can keep your sinking fund in a savings account.
Types of sinking funds
Below are some ideas of sinking funds that you might want to have in place. Start off small by choosing 2-3 sinking funds to begin with. As you grow more comfortable with contributing to sinking funds, you can increase how many you have (or just keep a few)!
- Car Maintenance: Cars are going to break, so you should be prepared for it!
- Christmas: Christmas is on the same day every year! Save a small amount of money each month to help cover the costs of the holiday season. To read more about how to budget for Christmas, click HERE.
- Home Repairs: Just like a car will need new tires, a home will need new appliances, air conditioners, etc. If you have a home repair sinking fund, you are sure to be less stressed when things don’t go as planned.
- Vacations: If you know that you want to take a vacation in a year, then why not set up a sinking fund to help cover the cost of the trip? Even if you don’t save enough for the entire trip, try saving for ¾ of it. Vacations are more fun when you pay for them in cash!
- Taxes/Insurance: When property values increase, your taxes will increase as well. Plan in advance by saving $50 each month to take the edge off the increased costs.
- Birthdays/Anniversaries: Don’t blow your monthly budget just because your family goes all out for birthdays and anniversaries!
- Medical Visits: If your insurance is not the best, or you aren’t able to put money into a pre-tax savings account, then have a medical sinking fund. Let’s face it, someone is going to get sick or break a bone.
Sinking funds help you reach your goals
Ultimately, sinking funds are here to help you reach your financial goals. They are a proactive way of acknowledging that not everything will go as planned. Don’t let situations control you. Have a sinking fund in place so that you are in control financially!
Sinking funds have saved us!
To be honest, we started using sinking funds 6 years ago because I struggle with anxiety (read more about dealing with money-related anxiety). Anytime we would have an unexpected purchase, my anxiety level would increase. I tend to want to be in control of things (if you know me you’re probably nodding right now), so I felt completely out of control when we didn’t plan in advance for something.
My anxiety usually centers around unexpected expenses like when a car needs to be fixed. Once we set up our car maintenance sinking fund, I immediately felt relief. I cannot tell you how many times one of our cars has needed an unexpected small (or large) repair and our sinking fund came to the rescue! If you also struggle with feeling defeated any time there is an unexpected expense, then set up a sinking fund. You’ll be so thankful when you know that you have money in place to cover any problems that come your way!
FREE printable sinking funds envelopes
If you think that keeping your sinking fund in envelopes is right for you, then sign up for my FREE Budgeting Basics Email Course! It includes cash envelopes, a debt thermometer, and a debt snowball tracker. You can simply print the envelopes on colored cardstock and keep your funds there. Enjoy!
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