There are about 10,000 Google searches a month on “sinking funds.” Honestly, a couple years ago I had never heard of this term. But recently, the concept of creating sinking funds categories in order to budget small amounts of money towards large upcoming expenses has become all the rage in personal finance!
I hate to break with convention, or maybe I enjoy it… but I do not subscribe to the sinking funds bandwagon. To me creating sinking funds categories for your savings is just another way to complicate finances. It’s pretty much the same story as a categorized budget for me- not on board! Isn’t money and life complicated enough?
What's In This Post
What are Sinking Funds
Sinking funds in personal finance are all the rage nowadays! They are basically just mini savings funds dedicated to different expenses you may have coming up in the future. In effect, they’re a divvied up, categorized version of your savings money. Much like a traditional budget is a divvied up, categorized version of your income in general.
Sinking Funds Categories & Examples
The most common sinking funds categories are:
- Gift funds (i.e. Christmas shopping, birthdays)
- Vacation
- House related expenses (maintenance, repairs, improvements)
- Vehicle expenses (maintenance, repairs, saving for a new car, etc.)
- Taxes
And there are many others out there as well, such as:
- Medical/dental/orthodontics (especially if you don’t have an HSA)
- Pet/veterinary expenses
- Annual/semi annual taxes or insurance
- Back-to-school fund
- Date night or other “fun” money
- Giving fund
- Clothes/shoes
As you can see, you could use a sinking fund to formally set aside money for basically any expense that isn’t a regular, recurring expense.
How Sinking Funds Work In A Perfect World
The whole point of sinking funds is that you take any large expenses and break them into nice, tidy, budgeted sums spread across multiple months. So, instead of saying, “Oh crap, my car broke down and I don’t have any money for repairs!” you say “Good thing I put $75 per month into my vehicle maintenance & repair fund” so that I now have that $500 I need for this unexpected expense!
Or, you want to take a big special family vacation in two years, so instead of feeling like you can’t ever afford it, you budget $250 each month for 24 months to build up to the $6,000 needed for the big trip. Voila.
Need money for something? There’s a sinking fund category for that.
That’s how it all is supposed to work.
Buuuut….. just like doing a categorized budget, this approach requires anticipating everything and piece-mealing out your savings. What if you have $250 to put into savings each month? Which fund should it go in- the vehicle maintenance fund? House repair fund? Or the vacation fund, Christmas shopping fund, back-to-school fund, or the health fund??
Should you split what you can save evenly across all your funds? What if one fund gets tapped and you need more? And where do you keep track of how much is in what over time without being super annoyed micromanaging your account(s)? And what about when things change? Priorities shift? New opportunities arise?
All these questions are a reflection of complicating something that doesn’t need to be that complicated. You can handle all of life’s big expenses, expected and unexpected, regular and irregular, in a simpler, more flexible way. With better control over your current-day priorities. No strict planning needed. No sinking fund categories needed.
Why Sinking Fund Categories Aren’t Worth Your Time
Because in my experience, life has been what happens when I was making other plans. Fortunately for me, my plans had me reaching for the stars. So ultimately, my reaching gave me options where others may have been stuck.
Save money for a crazy dream starting at age 10! Don’t save for anything because what on earth does a 10 year old need to save for? The difference? The first kid can afford their $4,000 computer set up for college.
Get perfect grades because only the best of the best get into the most competitive post-grad school. Don’t stress about grades cuz C’s get degrees. The difference? The first student can apply to anything- vet school, med school, grad school, law school, anything she eventually becomes interested in.
Save money like it’s a bad habit, even it’s only a little bit each month with nothing particular in mind. Spend 100% of your money because you don’t make much to begin with and don’t have a goal in mind right now anyway. The difference? The first person can afford the trip to New Zealand when she’s asked to stand up for her friend in her wedding, whereas the second cannot.
All of these examples are from my own personal experience at an early age. The big lesson?
Always max out your potential and you will have options. This is a life lesson, but also a money lesson.
So instead of calculating and formulating monthly savings rates for 10 different sinking funds categories, let me make it simple.
Save as much money as you can. In one big account. Period.
Yes, there are a few different ‘types’ of savings you need. But only three, actually. Not ten.
I’ll get to those below…
How To Do It Easier With Better Results
Now I’ll tell you how I handle all these things together, from biannual tax payments to car repairs to vacations, using a three layered concept for the savings account.All these needs fit into one account, because you maintain a minimum savings account balance that is your emergency fund (#1), line item out estimates for the estimated irregular expenses for the year ahead (#2), and everything you save over and above that is fueling your big picture stuff (#3).Let’s take the three layers one by one.
Layer #1: Emergency Fund
The first layer of your savings account funds is the most important. It’s the money that prevents living in a cycle of debt and blunts financial catastrophes.
In the three-layered savings concept, your emergency fund is your minimum acceptable savings account balance.
Emergency could mean loss of income (from layoff, illness, injury, etc). It also includes unexpected immediate expenses: major home repair (e.g. furnace failure), major car repair, plane tickets for unexpected trip (e.g. death, illness), healthcare costs beyond insurance coverage. The list of what-ifs can go on pretty long. It’s relatively easy to think these things ‘won’t [or probably won’t] to happen to me,’ but also easy to realize you should havesomemoney around, for when one happens here or there. You don’t need to know every possibility and its probability to have an emergency fund.
Layer #2: Irregular Bills & Planned Expenses
This second category are the things youshouldsee coming but people usually don’t. Hence, the recent personal finance obsession with sinking funds. Sinking funds remedy this by making you think about what sinking funds categories you need in your life, building in an allocation from your monthly budget to put towards these items.
So the Savings Layer #2 expenses of irregular bills or planned expenses generally encompasses all the things sinking funds are often used towards. But all in one account. Car maintenance is not the same as ’emergency breakdowns.’ Expect maintenance annually if you own a car, more or less depending on its age. Think tires, brakes, etc for each vehicle you own.
For us, flights for a family of four is one of these. We know we will fly to visit family at least once a year so it’s an uncommon, but predictable cost.
Other expenses to anticipate might be Christmas gift season, maternity leave coverage if your employer doesn’t provide this paid, other unpaid time off you plan to take, non-urgent but predictable and necessary home maintenance costs from painting to windows to roof replacement, the list goes on. If you wanted to have a particular amount built up for debt payoff by a certain date, you could build that in here too (in addition to your usual monthly debt payments).
For example, we recently spent $14,000 at our rental property, but it was in this second savings layer- it had been planned for. So, while it sucked to spend that much money (because it was for massive dead tree removal work, not something fun like a shiny new kitchen), we didn’t “feel it” at all because it had been a line item in my spreadsheet for tracking savings for years (trees die slowly, thankfully).
This list is more personal and requires some reflection about your life stage and circ*mstances- do you have kids with needs ahead (i.e. orthodontics), or have family living around the globe with expensive travel, friends with weddings in the coming months/years for which you’ll need an outfit/gift/travel, own a home/car that must be maintained? Do you own rental property?
So, while I do advocate thinking through a rough list of your major irregular bills and planned (or desired) expenses, I do not advocate a formal structure to budget monthly money separately into a fund for each of these separately.
Instead, a cashflow spreadsheet, like the example I made here will help you see how these costs play out over time and hep you prioritize what you want to afford when.
I use the same “Completed” and “Planned” columns I use for my monthly cashflow for the checking account. The savings example can see as a quick example in thisGoogle sheets link. Here’s just a quick screenshot:
Seeing these things coming and building them into your comprehensive savings plan will seriously raise your game when it comes to mastering your finances. It takes such onslaughts of big expenses from something that tears down your bank account seemingly constantly, to just another piece of the puzzle you’re prepared to respond to.
Just don’t overcomplicate it by separating out all the money!
Layer #3: Big picture savings goals
The third and final tier, the foundation and depths of your savings, is the relatively untouched money that fuels your long term goals in life. You want to buy a house? Retire early? Start a business? Get a long sought after bike, guitar, horse, car etc etc etc….?You must have the two categories of money above (cash for true emergencies and anticipated big ticket items) roughly planned in order to develop and protect this crucial base for making money work for you as a tool to live your best life.
Key Takeaways
By skipping the sinking funds categories and fueling a single three-layered savings account, you create security and flexibility.
You can pivot based on life’s changes and changing priorities. Baby on the way? Pivot! Real estate opportunity available? Pivot! Amazing travel opportunity with your bestie pop up? Pivot! Having everything in one place to track and simulate your savings cashflow is a more comprehensive approach to making solid, prioritized decisions with your stock-piled money.
To set aside a sinking fund for a planned bathroom remodel for $X a month to give you $Y total dollars by your target bathroom remodel date…. well, that only makes sense if the priority of the bathroom remodel is fixed. Meaning, if something else won’t arise that could possibly become more important than that sinking fund category, then it may deserve its own fund.
But I’d guess that most families are like mine. We’re all juggling a lot. A lot of competing priorities, necessities and wishes alike. Each with its own price tag and priorities can become fluid. Something at the top of my list can easily get bumped when life takes a sudden turn, for better or worse. Or your perspective simply evolves and plans change.
For example, the main reason driving my savings the last few years was to bank money to buy our own piece of land in the country. But when life shifted a bit, the vision became a bit clearer that achieving time freedom in the form of working only for myself and leaving a traditional career was more important than the country plot. So that money saved with a big rolling field in mind is now funding my transition to building my own business.
Sinking fund advocates (just like categorized budget advocates) might say, “Fine! You just change the category that money is in!” But then I wonder what is the point? Why pre-plan and allocate for this specific spending plan when you know it’s going to change.
I want your goal to be to save as much as possible. Amassing money will give you real opportunities. Much more opportunity than a line up of tidy sums boxed up and set aside specifically for those pesky car repairs or your wish list of home improvements. Think bigger and be ready for however life evolves.
Next, read these most popular posts on saving:
- Money saving habits that put serious cash in the bank
- Tracking Savings: Your Key For Turning Dreams Into Reality
