Saving

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Sinking Funds Categories: How Should You Split Your Savings Pots?

June 22, 2021

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.