Sinking funds categories can help you budget better and save more money.
But what exactly is a sinking fund?
A sinking fund, also known as a reserve fund, is basically a mini-savings account for upcoming expenses. With a sinking fund, you put money aside each month to pay for something.
Sinking funds are a better way to save for purchases or upcoming events such as Christmas.
This approach is particularly useful for people who don’t have enough spare cash in their paycheck to cover a large expense.
Ready to learn more about sinking funds? Let’s take a closer look at the types of sinking funds you should be using in your budget.
How does a sinking fund work?
To help explain how a sinking fund works, here’s an example.
Let’s say your annual car insurance bill for two cars is $1600.
Instead of scraping together the money when the bill arrives or paying for it monthly, set up a sinking fund instead. Put $133 aside for 12 months until you reach your goal and have the money to pay for your car insurance.
Start saving for the next premium straight away so you’ll have the money by the time the next bill is due.
How many sinking funds should you have?
How many sinking funds you have will depend on how much of your income you have spare.
It’s important not to put too much pressure on yourself to save for lots of things at once though.
If you have a hundred different sinking funds, you won’t be able to make much progress in any of them and it will take you a lot longer to reach your goals.
A better approach is to focus on your top priority categories.
For example, if you want to contribute $500 each month into sinking funds, you could split it as:
- $250 for a new car
- $100 for a vacation
- $50 for home improvements
- $50 for medical expenses
- $50 for Christmas
After 12 months of contributing to your sinking fund categories, your totals would be:
- $3000 for a new car
- $1,200 for a vacation
- $600 for home improvements
- $600 for medical expenses
- $600 for Christmas
Examples of sinking fund categories
Sinking funds should be an important part of your monthly budget.
You can save for anything you want with a sinking fund, big or small. Here are some popular categories to inspire you to set up your own.
Christmas
Christmas tends to sneak up on us every year, even though we have 12 months to plan financially.
Last year, Americans spent an average of $850 on Christmas gifts.
Why not create a sinking fund and take the stress out of trying to find cash for presents and festive food in the last few weeks to the big event?
Membership renewals
Don’t get caught off guard with membership fees for the zoo, Amazon Prime or the neighborhood pool.
By gradually saving for these expenses you will hardly notice the money going out, whereas you will definitely notice it if you try to pay for it all in one go.
Don’t have much room in your monthly budget? Skip the takeout coffee or lunch and use that money to put in your membership renewals sink fund instead.
Pet expenses
Looking after pets is expensive. From food and grooming costs to pet insurance and vet bills, the cost of owning and caring for a cat or a dog can quickly add up.
A sinking fund for pet care could be used for:
- Routine check-ups.
- Flea and worming treatments.
- Spraying and neutering.
- Food and bedding.
- Pet toys.
- Prescription medicines.
- Emergency veterinary care.
- Pet sitting services if you go away.
Gifts for special occasions
If you buy gifts and cards for birthdays, anniversaries, Mother’s Day, Father’s Day and weddings, putting some money aside each month can help ensure you have enough available without reaching for the credit card.
Set a limit on how much you want to spend per gift and use that amount to work out how much to put into your gifts for special occasions sinking fund category.
Don’t forget to factor in gift wrap and bags.
Medical costs
Even with appropriate insurance, medical costs can knock you back.
Typical medical costs include:
- Dental appointments and treatments.
- Eye care such as glasses or contact lenses.
- Prescription drugs and over-the-counter medicines.
Clothing and shoes
Even though you don’t need to buy clothes and shoes every month, putting regular money into this spending category will help when you do buy these items.
If you’re a parent, you’ll know that kids grow out of clothes quickly.
Having a sinking fund category for clothes makes perfect sense to help you plan for items that you need to buy regularly.
Insurance
Home, health, car and life insurance can eat away at your monthly budget.
Why not use a sinking fund to save for your insurance premiums instead?
Make a list of your annual insurance and fees. Work out how much you will need to put aside each month to cover them.
Home improvements
Sinking funds act as a financial safety net for expected costs such as home maintenance.
If you know your house will need a new roof in the near future, but don’t know exactly how much it will cost, creating a sinking fund will help you get financially prepared.
Vacations
Big expenses can be expensive, but they don’t have to be with a sinking fund. Plus sinking funds can be for fun things too, like vacations.
If you have at least one vacation a year, would you prefer to save $100 a month or struggle to find $1200 a few months before you go? Budget for vacation-related costs such as travel insurance, sunscreen and any clothes that you may need to make sure you’re financially ready.
Self-care
Self-care can include anything from hair appointments and spa treatments to candles and books.
Anything you do regularly will benefit from a sinking fund to help you save for the cost in advance.
Education
Whether it’s education to improve your skills, or your children’s future, education is expensive.
Tuition fees range from $5,000 to $50,000 in the United States.
Most people won’t earn enough to fund education for their children on top of their monthly outgoings.
However, breaking it down and regularly contributing to a sinking fund is a much more manageable way to save money over a longer period of time.
In your education fund, you can also put aside money for back-to-school items such as stationery and books.
How to set up and organize your sinking funds categories
Sinking funds help you stay on budget and prevent you from overspending.
Follow these simple steps to set up yours.
1. Review your budget to find out how much you can afford to save every month.
2. Choose your sinking funds categories. Use the list above for inspiration or create your own.
3. Next, write down what you need to save for each category.
4. Decide where you’re going to put your sinking fund, for example a separate bank account.
5. Then, work out what you need to save each month to meet your goal and adjust your budget accordingly.
If you prefer to see exactly which sinking funds your money is going into, use envelopes to organize your funds.
Relieve financial stress with a sinking fund
Sinking fund categories are a great way to help you save for expenses that don’t occur every month.
Stop wondering how you will pay for regular expenses throughout the year and set up your sinking fund categories to relieve financial stress.
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