Are you new to the term “sinking fund”? If you are, you are not the only one because whenever I mention it, I am usually met with a blank stare. Followed by… “What is that?”
Simply put, a sinking fund is a savings that is for a specific purpose. It is NOT your emergency fund. It is a separate fund that you are using to set money aside that will be used for a specific bill or event.
What Is The Difference Between A Sinking Fund And An Emergency Fund?
There is a difference between a sinking fund and an Emergency Fund.
An Emergency fund is for Emergencies only. Meaning, you are not expecting it. This would be things like medical emergencies, car breaks down, pipes burst in the house, those sorts of unexpected expenses.
A Sinking Fund is something that you are expecting to spend. This is stuff like your quarterly insurance bill, your annual real estate taxes, a new roof, a new car purchase, a vacation… those sorts of things that you know are coming up!
Are there times when you might need to tap into your Emergency Fund to cover something you should pay for with your sinking fund? Sure. Let’s use the example of a leaky rook. If your roof starts to leak and you don’t have enough money in the “new roof sinking fund” to replace it…. you would need to tap into the emergency fund. A leaky roof certainly classifies as an emergency.
Once you replace the roof, start a sinking fund for it. That way next time you need a new roof again… you have the money set aside and you won’t need to tap into the emergency fund again!
How Does A Sinking Fund Work?
The way a sinking fund works is by saving monthly for a large expense that you know is coming up. This means when that large expense comes due, it is not a huge hit to your budget. This includes bills that are due quarterly or annually as well as big purchases that you know you will need to make in the future such as a new car, a new roof, or a vacation.
For example, if your property taxes are $1,500 and you pay them annually, you would save $125 every month throughout the year. ($1,500 divided by 12 months before it is due = $125 that you need to save monthly.) Then, when the bill comes due you have $1,500 sitting in an account meant to be used specifically for your property tax bill.
Think about how much that would reduce your stress. Getting a $1,500 bill in the mail is stressful! UNLESS you have the money set aside ready to be used specifically for that bill.
What Types Of Things Would I Use A Sinking Fund To Save Up For?
There are 3 main types of Sinking Funds.
- Large Expenses/Bills. This would be anything that you pay quarterly or annually. Some examples are things such as taxes, insurance, subscriptions such as Amazon Prime, etc! Anything that you are paying quarterly or annually is usually a larger amount and that means it can be stressful to have to pay for it with one month’s budget. Saving up for it monthly means that when the bill comes in the mail, you are ready to pay it with the money that you have in your sinking fund!
- Big Purchases. This would be things such as purchasing a new car, replacing a roof, buying a new computer or phone. Things that you know are coming up in the future and will take a significant amount of money to purchase. Saving for this monthly will help reduce the stress when it comes time to make the purchase.
- Upcoming Events. This is anything from that vacation you want to take to the birthday gifts, Christmas gifts, and shower gifts you need to purchase. Saving for these things every month means that when it comes time to take the trip or buy the gifts, the money is there and it is meant to be used for that specific purpose!
How Do I Keep Track Of How Much Is In Each Fund?
If you have a lot of things you are saving up for, it can be hard to know how to keep track of it all. How do you know how much you have saved for each fund?
I like to have separate accounts set up for each fund… or at least each type of fund!
I know that sounds like a lot. But really, it’s not. Having separate accounts means that we don’t have to keep a spreadsheet updated with the amount in each fund. I’m not a spreadsheet gal. I can use them but they definitely don’t excite me. So I would much rather have separate accounts set up for each sinking fund in order to keep track of how much is in each fund!
Here is how we set up our separate accounts…
- We have a separate checking account that is for our large expenses/bills. For us this is stuff such as, propane, taxes, insurance, Amazon prime. We know the amount of those bills and we can easily add them up and divide by 12. Then, that amount is automatically transferred into our separate checking and when the bills come, they are paid from that account.
- We also have a car repair/replace savings and a house repair savings. We have a savings for vacations or other big things we are saving for at the moment as well. You can also have a gift savings. Or… what we do is just pull that money out in cash every month and save it in an envelope!
- We have all of these accounts nick-named appropriately on our online banking. That way we don’t have to even think about it or remember what each account is for. We have automatic transfers set up that happen every month without even thinking about it. The transfers go from our main checking out to these separate sinking funds. Then, when it’s time to pay the bill, take the vacation, or buy the gift… the money is there to use for that specific reason.
I’d love to hear from you… What are you using a Sinking Fund to save up for?