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Sinking Funds: Your Budget's Secret Weapon

Friday, December 22, 2023

Sinking Funds: Your Budget's Secret Weapon

There are many different tools we can use within our budgets, but one of the most successful (and helpful) tools is a little thing called a "sinking fund."

Wait...WTF is a sinking fund?!

Sinking funds are my absolute favorite part of the budget. All a sinking fund is is taking a non-monthly expense that we know is coming and planning ahead for it.

Let's use the example of Christmas...

Did you know that holiday retail sales this year will be over $1 trillion? And that doesn’t even include things like travel.

Every year at Christmastime, it seems people panic because they don't know how they will afford the Christmas they want. In 2018, it was reported by CNBC that the average American added over $1,000 of debt at Christmas. This is a massive amount of money to come out of one month’s income. And adding debt is definitely not what we want to do. So how can we avoid this annual, added financial burden?

Enter sinking funds.

The first thing we need to do is identify the total amount we will need for the expense.

Let's say I want to be able to spend $1,200 at Christmas. This number would include the total I would spend on any gifts, postage, decorations, food, wrapping supplies, travel, etc. Since Christmas comes the same time each year (as most recurring expenses like this do), I know I have 12 months to save for Christmas. So what we do is we take our goal amount (in this case, $1,200) and divide it by the number of months we have to save (in this case, we have 12 months):

$1,200 ÷ 12 months = $100

Looking at our example above, this means that each month, I will set aside $100 into a Christmas sinking fund. Now, by the time I get to Christmas next year, I will have saved $1,200 and I will be able to afford Christmas with cash.

Pretty nifty, right?!

And there are so many other expenses we can apply sinking funds to:

  • ​Christmas/Holidays
  • ​Back-to-School Shopping
  • ​Insurances
  • ​Vehicle Tags & Title Renewals
  • ​Annual or Bi-Annual Subscriptions
  • ​HOA Dues
  • ​Pets
  • ​Property Taxes
  • ​Vacations
  • ​Car Maintenance or Car Upgrades
  • ​Home Maintenance or Home Upgrades
  • ​Etc.

You can also organize your sinking funds however you would like. For example, instead of having a sinking fund for our dog's food/treats and a separate sinking fund for our dog's routine vet visits, we combined those into one sinking fund for our pet.

You can create as many, or as few, sinking funds as you would like. I know some people who just have one sinking fund and put them all together. I like to split them up and organize them so I have a clearer understanding of where the money is going.

The key is making it simple for you to understand and simple for you to track. Remember: it’s your budget.

Which brings us to our next question...

Where do you keep your sinking funds?

There is no right or wrong answer to this question. As I said above, you want to make it easy for yourself. So do what makes sense to you. To give an example, I will tell you what my wife and I do. We actually do a combination of keeping some sinking funds in our joint checking account (which is the main account for our household budget) and we also keep some sinking funds in an online high-yield savings account (HYSA).

Let me explain why and how we do it this way.

Some sinking funds are built up for a longer period of time, such as a vehicle replacement, a big vacation, a new roof, or taxes. So we would rather keep those sinking funds in a high-yield savings account that yields a much higher return than a basic checking or savings account (like, 10x kinda higher). Currently, we use Ally for our HYSA because they offer you the ability to separate this account into "buckets." This helps us organize the money in our online savings account and better track how much we have in each sinking fund (as we use their "buckets" as a way to hold our sinking funds). Something else to note about online savings accounts is there is typically a legal limit as to how many times you can withdraw from that account. So always be sure to know what your account will, and will not, allow you to do.

The other sinking funds we have are mostly smaller amounts for expenses that happen more frequently, which means we need quicker access to these funds. For these sinking funds, we keep them in the bottom of our main checking account. What I mean by this, is we simply keep all of these shorter-term sinking funds in our main checking account.

* A word of warning though: do not look at your sinking funds and think you can go spend it on something else. Remember, it already has a job to do.

Another important point worth mentioning is establishing a sinking fund for an unknown cost. I already promote adding a "Miscellaneous" line item to your budget, but what about those bigger expenses that you aren't expecting?

Let's use car maintenance as an example.

I have no idea how much my car maintenance will be, but I do know that my car will most likely need some work during the year. At the very least, I know my car will need its oil changed. But I want to be prepared in case there are other issues that come up. A simple Google search will show that the average yearly maintenance on a car is around $1,200. Using this example, I would recommend setting $100 off in a car maintenance sinking fund. But even setting $25 aside each month will help offset any repair cost. We're building new muscles here, so planning ahead is always a good thing.

Lastly, I want to acknowledge taxes.

If you have ever done any contract/freelance work, you most likely received a 1099. This means that you are responsible for setting aside money for taxes you will owe on that income. I recommend setting aside 25%-30% of these paychecks into a tax sinking fund. Make it automatic if you can; and since this is a yearly expense (or quarterly if you pay quarterly taxes), this would be a fund I’d recommend keeping in your HYSA. Now, when it’s time for tax season, you are ready when the tax bill comes.

As someone who has received 1099 income my entire adult life, I can't stress enough how important this step is. We want to avoid financial vulnerability, especially when it comes to the IRS. Practice diligence and intentionality and set the tax money aside as you get paid. This will save you so much stress when the tax bill arrives.

And sinking funds are going to relieve stress around a lot more, especially the holidays. Harvard reported that 62% of people are more stressed during the holidays. Bankrate reported 25% of holiday shoppers feel stressed over costs. And Psychology Today reported 65% of those stressed about money during the holidays are also concerned about their mental health.

So yes, this stuff is important.

Think of sinking funds as savings buckets for your expenses. My wife and I have one for car maintenance which we don't use every month; but we always know that we have money set aside for car repairs/oil changes/etc. (Because it's not "if" the car breaks down, it's "when.")

In essence, sinking funds aren't just about financial caution; they're about alleviating the weight of the unknown, empowering you to proactively navigate life's financial intricacies (Because there are a lot of them). They’re a shield against the stress and strain of unpredictable expenses, providing a safety net and a peace of mind that your budget is fortified.

So, whether it’s that festive holiday splurge, unexpected car repairs, or those infrequent yet sizable expenses, let sinking funds be your budget’s secret weapon, empowering you to take charge of your financial future, one fund at a time. And just watch how these sinking funds transform your mindset around money - the gift of financial resilience and serenity.

Happy budgeting!

Stay Curious,



Kyle Fowler

Founder of Financial Flippers

The personal finance world is packed with TONS of information. And while it's not all bad, it's not all good. I work hard to make sure I am sharing helpful content that keeps you on track while still providing different perspectives. If you ever have questions, want to share ideas for other topics, or want to know more, shoot me an email: kyle@financialflippers.com

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