What is a sinking fund, do I need one, how to set up sinking funds and what categories you could have? A sinking fund is a fund where you set money assigned for specific purpose, it could be paying off a debt or saving for a future expense. Regular readers will know I love talking about money on this blog and I even created a YouTube channel as an extension of this blog so I can continue to share and educate fellow women on how to manage your finances. In today’s post I want to share how to set-up sinking funds, why people need to have them and what kind of categories you can have.
Sinking funds are not a new concept there have been around for many years but mostly used by businesses and now more commonly with households. I came across the idea of sinking funds last year but I wasn’t sure if I wanted to set some up or stick to the then current way of managing my budget. Speaking of budgets, if you are new to budgeting, on my Etsy shop I share weekly and monthly trackers that you can utilise to track your money and understand where you are spending money and how much you can afford to put towards your retirement every single month. What I love about budgeting is that you can make them as flexible as you want but you nee to ensure that you track everything.
Disclaimer – I am not a financial advisor, for your specific financial help, please seek a professional.
How to Set Up Sinking Funds
Over the last few years, I have been quite fine and happy to track my finances in one tracker and keep my savings in two accounts (emergency and everyday saving). Every single time I needed to pay for an expense I knew was coming I would just withdraw from my everyday savings account and pay for that expense. I did not feel the need to create newer systems of saving money until recently when I became familiar with sinking funds and how helpful they can be for future expenses. What I love about sinking funds is that you can create your own set of rules on how you manage them, how you top up your sinking funds whether you are using cash envelopes or keep them digital like I do.
I have shared many times on this blog how I track and manage my money using excel trackers, pen & paper but also via Apps like Plum (affiliate link). But one thing I did not share is that once plum is done rounding off my change, when I have enough saved in the app, I just transfer that money back into my main account where it came from. I wanted to find a better way to manage this money I am saving so I googled ‘how to set up sinking funds’ as I figured it was time to start putting this money to good use. There were many options that came up but one thing I knew is that I did not want cash envelopes as I don’t fancy going to withdraw the money and keeping it in the house.
When it comes to setting up sinking funds, the world is your oyster, you can set-up as many as you wish and personally I decided to set-up 9. You don’t need to set-up this many, I have personal reasons why I chose to set this many up but just to give you an idea, below is a video about sinking funds I recently created/set-up for various things that I want to be keeping a little for every single month. My intention is to top these sinking fund up every single Friday and share a video on my channel about how I am progressing.
In the video, I spoke about where the money to stuff the digital sinking funds would be coming from and above I have mentioned about my desire to ensure all the change that Plum collects are put into these sinking funds. Two of the sinking funds I set-up are Dental and Gifts (the other 7 you can see in the video) and I pick these two because I am still searching for the best dental cover as my work’s current one doesn’t benefit me much. As for the gifts sinking fund, I do have my brother’s birthday coming up this month and I am hoping to save £50 for his birthday. Often I would just absorb the cost of the gifts in my budget and make it a miscellaneous (unplanned) expenditure but I think having a sinking fund for something I know is coming (if this case comes round every year) was a no-brainer.
Setting up sinking funds doesn’t mean you shouldn’t have separate savings account, not at all. I know people who keep trackers of how much money each sinking fund should have but keep the combined balance in one savings account. I think if this is the route you choose then make sure to keep meticulous records so you don’t overspend in one sinking. I choose to keep 7 of my 9 sinking funds in one account but for the 2 mentioned above I am keeping separate as these will be used every single month due to birthdays and because I have dental work coming up in the next couple months.
So, if you are interested and want to learn how to set up sinking funds, watch my video above for detailed explanation but below is a quick snippet:
- Before setting up sinking funds, think about what you wish to save for – Christmas, home maintenance, car repairs, birthdays, debt and the like.
- Then determine where the money to fund these sinking funds would come from – all the change from your everyday spending, dedicate an amount in your budget or if you have side hustles, dedicate the passive income to sinking funds.
- Decide the type of sinking funds you want to set-up – cash envelopes or Digital sinking funds.
- Decide on the frequency of your deposit or stuffing – you want to withdraw the money every 2 weeks or once a month for cash envelopes or do weekly deposits of your change to your digital sinking funds.
- Choose where you will keep a record of your sinking funds and the current status – I use both excel and Monzo.
Setting up sinking funds doesn’t need to be complicated, just decide what future expenses you want to save for or what debt you want to pay off earlier and create them. I love having sinking funds because if my budget changes from one month to the other, I still have those funds to utilise for the specific reason I saved them up for.
Do you have sinking funds? If so, what type?
Ruth I says
This is all new to me. I’ve learned a lot from this. I will be setting up sinking fund for Christmas and house.
Catalina says
It seems that I need a sinking fund and these are precious info for me. I will definitely keep them in my mind.
monicasimpson28 says
We need all the help we can get with financial matters. We really want to get serious about setting aside college money for the kids.
Melissa Cushing says
I have never heard of a sinking fund but same idea as my savings account. Saving money is every thing to me and wish I knew what I know now when I was in my 20’s….. as I would be a saving queen from an early age. Unfortunately…. when I was in my 20’s I never thought of the future and wasted lots of time and money. I am making sure my kids know better and my kids are savers too 😉 Thank you for this informative post and sharing with my oldest child!
Sarah Bailey says
This is interesting I have to admit I’ve not heard of sinking funds before but I think it is something I need to think about setting up.
Garf says
I always do that for upcoming big expenses and for travels too. It feels good to set up sinking funds.
Danielle Fox says
This is a cool concept – before I got married and did my own accounting I would take 10% of whatever was in my checking each Monday and move it to savings. Then it didn’t exist anymore – that is how I saved
Heather D says
This is so smart. In a world of spend spend spend it’s important to take charge of our finances.
Nikki Wayne says
I’m not really knowledgeable with this topic so thanks a lot for sharing this post.
LuciWest says
Very interesting. I didn’t know about Sinking Funds – or consider creating a separate savings account besides my general and emergency savings accounts.
Sondra says
Thanks for sharing this. I have a few funds set off on the side for specific purposes.
Amber Myers says
I need to keep this in mind. I do have funds set aside when I want to do fun things! That way if I run out, I know that’s it for the month.
Tara Pittman says
I need to do more investing. This sounds like a way to invest my money better.
Tammy says
I didn’t know it had a specific name. I always called it saving for a rainy day. I’m glad I have done that because you never know when I big purchase is down the road.
MELANIE EDJOURIAN says
I have a separate account set up for emergencies only at the moment. I’d like to set up a few others too.
Cristina Petrini says
Let’s say that it is not an easy topic and although I can say that I know it and apply it in my life, you have been good at explaining it in such a precise way!