All About Sinking Funds & Why You Need Them

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Always shocked by big bills? Sinking funds help break down large expenses into bite size pieces so that you don’t have to be stressed when paying that bill.

Sinking Funds are used historically in businesses to replace assets (equipment, buildings, etc.) as they age and break down. The same idea can be applied to our personal finances as well.

We know that things will wear out and need to be replaced, so why are we living as if we’ll never have to buy clothes, or replace our roof? By building these expenses into small monthly amounts that we can save, you won’t be shocked by a big bill when your old furnace dies, or Christmas rolls around again.

What Are Sinking Funds?

The idea for personal finance sinking funds was popularized by Dave Ramsey. Sinking funds are basically when you save for a certain event or goal monthly so you don’t have a big expense all at once. You can have them for basically anything that you know you’ll have to buy eventually.

What Should I Have Sinking Funds For?

While this concept isn’t really new to me, I haven’t always implemented it in the past. How many times do you say to yourself in December that you should be saving for Christmas all year? Well I started that last month. Some other ideas of sinking funds would be:

• Gifts
• Vacations
• Home repairs
• Medical expenses
• Pets
• Large bills

How much you’ll need to save depends on a) what you can afford, and b) how much you’ll need and when.

Where Should I Store A Sinking Fund?

Ideally you should have a different spot for each different sinking fund. If it’s all in one account it will be too easy to get each sinking fund mixed up. You can open up high interest savings accounts, or take out the cash every month and keep it somewhere safe. The important part is that it’s not too easy to get to so that you aren’t tempted to spend it on anything other than what it’s supposed to be for.

Build It Into Your Budget

The easiest way to manage your sinking funds is to set it and forget it! Meaning set up an automatic transfer, once a month, or on payday, whatever works for you. Setting up an automatic transfer means you won’t have to remember to do it, and you’ll be more consistent.

If you transfer the same amount every month, then it’s easy to put into your monthly budget worksheet.

Sinking Funds vs Emergency Funds

Sometimes it can be easy to get these two things confused, but they are different in one important way: sinking funds are for things that you expect, things like Christmas, your yearly insurance premium, the fact that you will need a new car eventually. Emergency funds are for unexpected incidents like a job loss, a car accident, or your heater breaks in the middle of winter. Basically if its unexpected, urgent,and necessary then you should use your emergency fund!

Final Thoughts

To me, sinking funds are a way of taking the stress and worry out of irregular expenses. We are now saving every month for these expected expenses and I know the money will be there when we need it. After our debt is paid off, we’ll be setting up sinking funds for a new car, and probably some house projects!