Picture this…
It’s December and there is so much excitement happening in your life. The parties, the gifts, the food. And while there is so much joy during this time, in past years, you’ve carried a shadow of guilt wherever you go. But not this year. This year you’re not putting meals or gifts on your credit card. This year you had a “holiday fund” set aside for all your shopping and festivity needs. No guilt and no debt. That’s the power of having a sinking fund.
Step 1. Choose your funds
Think of a sinking fund as a bucket where you slowly add money for specific goals. Such as things like home repairs, Christmas, back to school shopping, vacations, and more.
Here is my personal and current list of sinking funds:
- Christmas/gifts
- Auto Insurance (paid yearly)
- Health Insurance (paid yearly)
- Car Maintenance
- Yearly Subscriptions
- Credit Card Fees (because I’m a travel hacking girlie)
- Vacation
Really dig deep into your needs. What is a large payment that comes up every year that you are not prepared for? Does your house need a new roof? Do you have a European vacation planned for next year?
Step 2. Figure out your fund amounts
After making your list, decide how much you need to set aside to make these funds a reality. Come up with a total amount and work backward:
- Example: Let’s say your auto insurance is $1200 yearly. → set aside $100 a month or $50 per paycheck if you’re paid twice a month.
- Example: If you’re looking to replace your roof in the next 5 years and it will cost $20,000 → set aside $4,000 per year, or $333 per month to be prepared for this huge expense.
This way, you’ll be prepared for big purchases without going into debt.
PRO TIP: Treat this as a non-negotiable budget line item.
Step 3. Where to keep your sinking fund (and how to keep track)
You can track your sinking funds in many ways – an app, a bank account, or even a spreadsheet.
Most of my clients keep their sinking funds in their bank, usually in a savings account. Some banks even offer “buckets” to visually separate out your money. Others find comfort keeping this money at home. Less tempted to use a debit card and break into the money you have for sinking funds. Usually that money will be in envelopes labeled with what the money is going towards.
Here are 4 methods to keep track of your sinking funds:
- Pen & paper – Write down deposits and withdrawals.
- Spreadsheet – Track each fund digitally.
- App – Many budgeting apps support sinking funds.
- Bank sub-accounts – Use buckets or separate accounts for clarity.
Why do sinking funds work?
They keep you prepared. By saving a little each month for car maintenance, you’ll be ready for when something breaks down without touching your emergency fund or racking up debt. Sinking funds create less stress around money because you know you have the safety net you planned for. Sinking funds provide you with more confidence about your money!
Some common mistakes I see people make when it comes to sinking funds:
- Not actually keeping track of the money. They have a balance in their savings account but don’t remember how much belongs to each category.
- “Stealing” from their sinking fund because they overspent on other areas.
Final thoughts
Starting a sinking fund is simple, but it can transform your financial life. It gives you peace of mind, reduces stress, and keeps you out of debt.
Are you ready to start a sinking fund today? Grab my free template here!
