HOW SINKING FUNDS CAN SAVE YOUR BUDGET

WHAT ARE SINKING FUNDS?

I have done several episodes on sinking funds over the years. But, I still think it is important to bring it up at least once in a while. When I went back and check my notes the last time I did an episode on sinking funds was last summer. So, I think we are due for another mention about how useful sinking funds can be to help you stick to your budget. If you are not familiar with the term sinking fund, it is basically an amount of money set aside for a specific future expense. The account is typically funded on a weekly or bi-weekly basis so that by the time that expense is expected to happen, the money is already set aside.

Sinking funds are used for the types of expenses that you know will be coming, they just don’t occur on a regular weekly or monthly schedule. So, when they do come up, you don’t want to use other resources to cover them if you fall short. Sinking funds can be segregated within your main checking or savings accounts. Or they can be in separate bank accounts – it just depends on what works best for you and how detailed you want to get.

THE BENEFIT OF USING SINKING FUNDS

When I first started budgeting I struggled with going over budget all the time because I would forget about the expenses that did not occur on a regular weekly or monthly frequency. I would account for the big irregular expenses, like annual home or auto car insurance. But, I didn’t really take into account things like pet food, birthday gifts, medical co-pays, school supplies, and all of those other random things that I assumed would be covered by the misc portion of my weekly budget. What I didn’t take into account was that on the weeks when these expenses did not occur, I would spend the money on other things.

The times when these expenses did come up, it seemed like they all came at once. One kid would need supplies for a school project, we would get invited to a birthday party, or I would have an unexpected doctor’s visit, and have to also pay for a prescription. Because everything hit at once, I would go over budget because I had no money set aside to cover these items from previous weeks when we were under. As these types of expenses kept happening, I started to take note of what they were and started putting money aside each week instead of spending it. As the expenses came up in the future, I had money aside for them.

OVER TIME YOU WILL GET MORE ACCURATE

It took a while to figure out how much to put aside each week and to get ahold of all of these types of expenses, but it kept getting better and better. By thinking ahead and putting money aside each week for these expenses I knew would be coming, I eliminated so much stress that was caused by all of these things happening at the same time. Since I had money set aside to cover the expenses, it really didn’t matter when they occurred.

RECORD YOUR EXPENSES EACH DAY

It is not necessary to be super detailed in your sinking funds. You can come up with a weekly amount to will roughly cover all of those random expenses that you think of that you know are coming. When one of the expenses comes up you can just pull from your general sinking fund account. I like to be more detailed with mine. It really just depends on your preference. Even if you want to have a general sinking fund, you might want to give a try to setting up a few smaller ones for specific purposes. I especially like to do this for future events or fun things like going on a day trip or having a pizza night. It’s fun to see that you have a certain amount of money put away for a specific purpose like that.

It’s also important to not discount putting away small amounts of money because they might seem like they don’t matter. After one of my daughters had her prom, it occurred to me that I could start saving up for my next daughter’s prom even though it was a few years out. So, I decided to start putting aside $3 per week to save up for her prom. Putting aside $3 a week might seem like a waste of time to some people. But, I don’t think they would be upset about having an extra $300 sitting aside to use for an event that you know is going to be coming.

SINKING FUNDS HELP YOU CONTROL YOUR SPENDING

When you account for putting money into your sinking funds as part of your weekly spending budget it can really help you control your expenses. If you know that you have to save money for upcoming expenses you will not have a false sense of having extra money to spend on other random things that may not even be important to you. Including savings for these future expenses, really helps you see the full picture and allocate your earnings properly so that you can cover expenses that will come later on. As I said, this has been the single most important thing that I have done that has helped me with sticking to my budget.

HAVE SINKING FUNDS FOR THE FUN THINGS TOO

It is important to account for as many future expenses as you can when deciding how much you want to put aside each period to fund your sinking funds. But remember that this isn’t only for essentials. If you have a little bit of money left in your budget, it’s fun to put money aside just for things that you enjoy. Some examples of sinking funds you can set up just for the fun of it are for things like pizza night, family fun, having a movie night, or whatever else you might enjoy.

There is something about pulling money to pay for these things from a pool of money that was already set aside for that purpose that feels so good. It also helps you stay within your spending limits. If you see you have $30 set aside for a family pizza night, you might skip the extra appetizers. But, if you see you have extra set aside, you might decide to splurge a little.

TRANSFERRING FROM SINKING FUNDS

As we all know, no matter how much we plan, something else always comes up that we didn’t think of. It is nice to have some sinking funds we can pull from to cover other expenses if needed. We don’t want to pull from things like money set aside for insurance, but if we have money set aside for a pizza night, that’s money we could easily put towards an unexpected expense that came up. We can easily skip the pizza night until we save up a little bit more for next time.

Sometimes you might end up with more in a sinking fund than you know you will need. This money can be transferred to another fund or to cover some other expenses. For example, we have a spare truck that we only need to put gas in once in a while. So, I put a little bit aside each week until we have enough for a tank of gas. Knowing that I will never need to put more than a tank of gas in at once, I can reallocate excess funds from that account to something else until we do end up getting gas.

IDEAS FOR EXPENSES TO CREATE SINKING FUNDS FOR

HOME REPAIRS / MAINTENANCE, CAR MAINTENANCE, MEDICAL CO-PAYS / PRESCRIPTIONS, ANNUAL / SEMI-ANNUAL INSURANCE PAYMENTS, ANNUAL SUBSCRIPTIONS / FEES, PET FOOD / SUPPLIES, VET BILLS, BIRTHDAY DAY GIFTS, HOLIDAYS, CLOTHING, SCHOOL SUPPLIES, PIZZA / TAKE OUT FOOD, FAMILY FUN, VACATIONS

CONSIDER GIVING THIS A TRY, EVEN JUST FOR ONE EXPENSE

If this is new to you, consider starting small. Pick the one expense category that you find most often causes you to go over budget. Set up a sinking fund for that expense.  Estimate how much you spend over the course of the year, and put away an amount each week or month to start saving up for that cost. Don’t worry too much if you are not sure of the exact amount to save. Over time, you will get a better handle on how much is needed.

Thanks so much for checking in! If you would like to hear the podcast version of this topic check out Lola’s Frugal Life Podcast! Also, be sure to check out my other blog posts on this site!

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