sinking-fund-savings

Sinking Funds: The No. 1 Secret To Having A Successful Budget

So, you know what an emergency fund is but what is a sinking fund? Do you really need one in your budget?

To be honest, I’ve just recently become familiar with the term “sinking fund,” but I’ve been using this method for saving for our financial goals for some time now.

Sinking funds are an amazing tool to use in your financial journey. They will help you to plan ahead for expenses and stay on track with your budget.

Creating sinking funds in my budget is one of my favorite ways to save and manage our finances and I can’t wait to tell you more about sinking funds. This is a long post, so, sit back, sip some coffee or tea, and enjoy reading. 🙂

What is a Sinking Fund?

A sinking fund is the money you set aside each month for specific, short-term financial expenses like your child’s tuition fee, your annual life insurance premium, birthdays, or Christmas gifts.

You know that these expenses are inevitable but they always seem to catch you off guard. By setting up a sinking fund, you will be able to save up money over time so you won’t be surprised by these expenses.

Think about it this way. You are budgeting every month, telling every peso where to go. But, suddenly, it is Christmas again.

Even though you knew it was coming, somehow it snuck up on you financially. And, instead of having money saved to spend on Christmas, you end up relying on your credit card and paying Christmas off some time later.

Yes, you were able to have a memorable Christmas and you were able to give nice gifts, but your budget just got blasted.

Has that ever happened to you? Unfortunately, many of us rack up debts during the holiday seasons.

Having a sinking fund can help us be prepared for the holidays, and other upcoming expenses, without increasing our debt load. 

Sinking Fund vs Emergency Fund

An emergency fund is reserved for the unexpected while a sinking fund is reserved for the expected.

Emergency funds are for emergencies. You don’t expect them to happen but you are setting money aside, usually 3-6 months worth of expenses saved for all possible life emergencies.

Examples of emergencies:

  • Job loss
  • Medical emergency
  • Car broke down and needed repair
  • An extended family member needing financial assistance

You may not even use your emergency fund but having it there will give you peace of mind when the time comes.

READ: How To Build Your Emergency Fund

Sinking funds, on the other hand, are reserved for things that you expect to happen. It is designed and created to save for a specific purpose or expense. You know what you are saving for, how much you’ll put in it, and when you will need to use it.

Examples of sinking funds:

  • Birthdays
  • Christmas
  • Tuition Fee
  • Car Maintenance/Repair

Both of these savings strategies will make you feel more at ease when it comes time to needing the money, but they are created for very different reasons.

Sinking Fund vs Savings Account

A savings account is the place where you store your money while a sinking fund is the purpose you’ve given that money.

A regular savings account houses funds for anything and everything without a well defined purpose. Maybe a little bit for travel or vacation, maybe a new gadget or furniture, or maybe you just want to save money for anything that you may want to buy or pay for in the future?

In short, you’re blindly throwing money in your savings account not giving it a job.

In practice, you can either set up multiple savings accounts for each sinking fund, or you can use a single savings account for all of them. Either way, you’ll want to make sure the sinking funds are well defined in your budget.

Why Are Sinking Funds Important

If you’ll review your expenses from the previous year, you’ll notice that there are certain expenses that come up every year, every quarter, or every few months.

I’m talking about birthdays, anniversaries, vacations, back-to-school expenses, home maintenance, car registration and maintenance, insurances, Christmas and New Year, and annual dues.

Oftentimes, these expenses are put on the back burner because “there’s still time” until there’s not.

With a sinking fund, you’ll be able to save ₱5,000 for your car maintenance and it won’t hurt the budget at all.

You’ll also be able to afford to go on a family vacation to celebrate your anniversary for ₱20,000 or more without having to pull out the credit card or without worrying the whole time “How am I going to pay for this?”

Because when you’re on vacation you want to enjoy it, not panic about the fact that your husband ordered the seafood extravaganza platter for dinner! You can enjoy your vacation better knowing you won’t be coming home to zero money in the bank or a maxed out credit card.

Setting up sinking funds is one of the best ways you can prevent getting knocked off course as you follow your path to financial freedom.

By planning for these expenses in advance, you make sure you’re able to handle them in stride without breaking your budget.

And, by spreading the savings out over time you make it a painless process that you’ll barely even notice.

How to Set up a Sinking Fund in 3 Easy Steps

Step 1: Write down your upcoming expenses

The first step to creating sinking funds is to brainstorm your true expenses.

What large, irregular expenses can you envision coming up in the next few months or next year?

Or, you can think back to the “oh crap” moments you got hit with last year. What bills came that stressed you out?

You might also want to look through your old receipts or credit card and bank statements for any annual or irregular expenses you’ve forgotten about.

List out as many as you can think of and write the estimated amount and due date of each expense.

Here are some examples:

SINKING FUNDAMOUNTDATE
Child’s Birthday₱5,000October 18
Anniversary₱5,000June 4
Car Registration₱5,000May 30
Travel / Staycation₱10,000May 15
Tuition Fee₱30,000August 1
Christmas Gifts₱10,000December 15
Life Insurance₱10,000November 15
New Cellphone₱25,000November 30
TOTAL₱100,000

Step 2: Order your sinking funds by priority.

Determining which funds get how much money will depend on your priorities and your current financial situation.

Look at expenses that may be coming up sooner and consider funding them first.

For example, you’ve been saving up for your child’s tuition that’s due in August. Then, you remembered that your car’s insurance is due in May so you had to move your car insurance fund to the top of your list.

Put more money toward the sinking funds you expect to need in the near future while dialing back some other sinking funds.

Step 3: Calculate how much money you have every month to put towards your savings.

They key here is to look at your current budget. If you don’t have a budget yet, I suggest you create a budget first so that you know where you are in terms of your income and expenses.

Get a pen and paper or use my free monthly budget template to create a budget. (Click the image below to download.)

  • Write down your expected income.
  • Make a list of all your expenses.
  • Get the difference of your income minus expenses

Creating a budget is important because this will give you an idea if you still have something left to put towards your savings.

READ: How to Make a Monthly Budget For Beginners

For example, if your income is ₱50,000 and your total expenses is ₱40,000, the difference is ₱10,000.

Once you have an idea of how much you want to save, determine how long you have to save it. Then divide by the months left to see how much you should be saving each month.

If you have the same ₱10,000 every month to put towards saving, divide the ₱10,000 into your sinking fund categories, and save that amount for 10 months.

(Note: I used 10 months to make it easier to compute, but the number of months depends on your priorities and current financial situation. You may also divide it into paychecks instead of months.)

SINKING FUNDGOAL# OF MONTHS TO SAVEAMOUNT TO SAVE PER MONTH
Child’s Birthday₱5,00010₱500
Anniversary₱5,00010₱500
Car Registration₱5,00010₱500
Travel / Staycation₱10,00010₱1,000
Tuition Fee₱30,00010₱3,000
Christmas Gifts₱10,00010₱1,000
Life Insurance₱10,00010₱1,000
New Cellphone₱25,00010₱2,500
TOTAL₱100,000₱10,000

After 10 months, you should have achieved your savings goals for all your sinking funds.

What If I don’t have enough money left to save for all my sinking funds?

I suggest that you start with the most important and work your way down. Once you get one category fully funded, roll that money over into something else until you have everything covered.

If you are in the early stages and something crops up sooner than expected, one option would be to borrow from the other funds. Another possibility to consider is picking up a side hustle to earn extra income. Or, go over your budget again and see if you can adjust some of your expenses to make room for savings.

How Many Sinking Funds Should I Create?

You can create as many sinking funds as you can think of, but when it comes to funding them, make sure you’re doing so according to your priorities.

Don’t try to save for every possible expense at once. Pick some sinking funds from the list below that are most important to your personal situation and start building those. You can always add more later on. 

Be careful not to create too many sinking funds or you won’t have any money left over for debt payment or other savings, giving, or investing goals.

Christmas

Christmas comes at the same time every year! Rather than trying to figure out how to come up with ₱10,000 for the holiday, all in one month, the better option is to save a little bit each month. Not only will a Christmas sinking fund help you prepare far in advance for purchasing gifts, but it will also help you to carefully think through how much you truly want to spend on gifts for your loved ones. 

Home Repairs

Every home owner should have money set aside for home repairs, because it’s not a matter of IF something will break or need replacing, it’s a matter of WHEN. Whether it’s the washing machine that breaks down, roof that needs replacing, or a new furniture project that your husband wants to work on, it’s best to be prepared instead of scratching your head wondering how you’re going to pay for it.

Medical Expenses

This sinking fund is a general medical fund in our budget. It encompasses eye doctor visits and glasses, dental appointments, prescription costs, and other medical costs that are not covered in our health card.

We recently had our dental appointment and despite having a family health card with dental coverage, we still ended up paying out-of-pocket expense of ₱3,000.

While we could have paid for that out of our regular “Miscellaneous” budget category, having the medical sinking fund allowed us to save the “miscellaneous” money for other unexpected items later in the month.

Car Maintenance / Repair

Owning a car comes with costs – car payments, gas, insurance premiums, car registration, new battery, new set of tires, and car repair. A car sinking fund can truly be a gamechanger in controlling car expenses.

Birthdays / Gifts

Similar to Christmas, birthdays come around once a year, on the same day. Buying birthday gifts, paying for party supplies, going out to dinner or doing a fun activity are all awesome! But, they can seriously wreak havoc on your monthly budget if you haven’t prepared in advance.

Other gifts you might consider are anniversaries, mother’s day, father’s day, weddings, baby showers, etc. It can be hard to know if a friend or family member will have a big life event (wedding, baby, etc.) but having a small budget via a sinking fund for such an occasion will allow you to be prepared if/when that happens.

Travel / Vacation

It is still important to have fun! And planning in advance for how you will pay for your travel or vacation will make the experience much more fun. Whether is it a big vacation or a small one, having the money in advance will take the financial stress out of the equation.

Where Should I Save My Sinking Funds?

If you’re using a budget to track your money instead of looking at your bank balance to determine your spending, it really doesn’t matter where you actually keep the money.

That said, there are a couple reasons you may not want to keep your sinking funds mixed into your regular checking account.

First, if you have any tendency to overspend, keeping that savings in a separate account, or even at a separate bank, will make sure it’s out of sight and out of mind.

Second, while you may not have much money in your sinking funds to start, eventually the amount will grow and you’ll want to earn as much interest as possible on it.

Since sinking funds are considered short-term savings, it’s not a good idea to invest that money in the stock market. But you can put it into a high interest savings account to earn some interest while it’s waiting to be used.

I recommend keeping a ledger, tracker, or spreadsheet to track how much money is in each fund at any given time.

You may consider putting your Sinking Funds in the following banks/institutions, but make sure to do your due diligence first.

  1. Digital Banks – CIMB, ING
  2. Coop – Savings Account
  3. Banks – Time Deposit, Money Market Fund

You may also use cash envelopes for your sinking funds and keep them in a safe place. Cash envelopes are nice because it makes it harder for you to ‘accidentally’ spend money you needed for savings – you’d literally have to go into each envelope and take the money away. It also makes tracking easy as you can physically count out your cash. 

The downside to this method is that you would need to go and get the cash out every time you wanted to add to the fund. And since you have the cash at home, you may be tempted to use it for some unplanned expenses.

What’s the Best Way to Track Sinking Funds?

Lots of people prefer to keep their sinking funds separated out into different savings accounts.

I like to set up different sinking fund categories in my budget while leaving the actual cash to accumulate in a single, high yield savings account or in an account with free life insurance like BPI Save-up. It’s just simpler for me.

Regardless of how many accounts you use, make sure you have easy access to withdraw or transfer that money when the time comes.

Final Thoughts

Sinking Funds are one of the biggest budget savers, and one of the easiest ways to stay on budget every month.

It takes a lot of discipline to set up and maintain sinking funds, but I have no doubts that you can do it! Once you have your sinking funds in place, the stress and panic for how to pay for things will decrease significantly.

Instead of feeling stressed, looking at a bill for something you know you should have/could have anticipated, you will have peace knowing you already have the money to pay for it.

So take a look at your personal needs and decide on some sinking funds categories to start working on. Take it slow if you need to. Pick one or two to get started. And then slowly build up from there.

You got this. Leave me a comment with the sinking funds you use, or plan to start, and let me know if I can help. 

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