Sinking funds are money saved for future expected expenses. Sinking funds help to take the financial stress out of your life as you are plan and save ahead for future expenses.
For example, if you know that the roof needs to be replaced within the next 5 years, you can start a sinking fund to save a $150 a month now instead of stressing to come up with $9000 suddenly in five years’ time.
Are Sinking fund the same as Emergency fund?
Sinking fund is not the same as an emergency fund. Emergency funds are meant for unexpected expenses, such as medical bills for a sudden serious illness or to cover day to day expenses during a loss of job.
On the other hand, replacing the roof is a known expected expense. The goal of setting up a sinking fund for the roof replacement is so that we never have to dip into our emergency funds for it.
Imagine if you happen to lose your job when the roof needs to be replaced. If you only have emergency funds saved up, you will be stressed over fixing the roof or paying for next month’s rent or mortgages.
Are Sinking Funds the same as Saving Goals?
Yes, in a way that saving goals also involve saving up same amount over time to accumulate the necessary funds that you need.
The key difference is that most people usually relate saving goals to fun, happy exciting things like saving for a big holiday or saving for a new computer.
Less likely, people would classify boring mundane things like replace the roof, auto car maintenance and home maintenance as ‘saving goals’.
So, sinking funds are intended to be broader than saving goals. Sinking funds cover not just happy events but also necessary expenses for day to day living.
Sinking Funds Reflects your True Living Expenses
Including sinking funds as a part of your budget helps to build a more accurate picture of your true living expenses.
For example, most people typically only track and budget for their monthly mobile phone bills. What if they include a sinking fund for a new phone every two years? That will reflect the true cost of mobile phone ownership and usage.
When you see your true cost of living, you can choose to save up appropriately for it or consider ways to lower your cost of living. In this case, you can choose to buy a cheaper mobile phone, or choose to stretch it to replacing your phone every three years instead of two years.
Sinking Funds Ensure that You Save Enough For What you Need
One mistake I made in my early days of budgeting was not budgeting for such future expenses and dealing with sudden spending spikes that exceeded our planned budget amount.
One example is dealing with kids enrichment activities and classes. Typically these are paid upfront every three to four months. I will make the payment in the first month and suddenly feel really rich in the second and third month, only to feel poor again in the fourth month.
The worse was when we would splurge on eating out during the second and third month because we were feeling rich. When the fourth month comes around, we would scramble to find the funds that we need.
So instead what I do now is create a sinking fund for it by dividing the cost of such expected expenses into a fixed monthly amount that can be added to my monthly budget.
This forces me to consistently save the money that I will need in three months’ time. This reminds me not to spend mindlessly in the second or third month because the money has been earmarked for the next month.
Where should you keep your sinking funds?
I recommend creating a separate savings account for your sinking funds. You can get a slightly better interest rate than regular checking account while the money is being accumulated.
I also believe in keeping this planned saving out of sight and out of mind from your regular checking account. As I shared above, there is sometimes huge danger when you start to feel too rich.
Ideally it should also be a different account from your emergency funds, since they are intended for different purposes.
65 Sinking Fund Categories for your Budget
Adding sinking funds to your budget is a great way to normalize your budget. Saving for future expenses as a sinking fund helps to even out the spikes and troughs due to the lumpy nature of these expected expenses.
The best way to create your own list of sinking funds is to go through each major expense category in your life and think of things that will need to be replaced or recurring expenses that does not happen on a monthly basis.
1. Home Sinking Funds
Owing a home can get expensive real fast. If anything breaks down, the air conditioning or heater or plumbing backup, we are sometimes talking about a few thousands dollars to repair or fix the issue.
Start with the major items, if you know the roof is almost at the end of their life, create a separate fund for it. Next, you also need to include supplies for wear and tear like caulks and sealants and air filters.
Some items include:
- Major appliance replacement. Depending the age of the appliances, you might need a new stove, fridge or air conditioner.
- Roof replacement. The average lifespan of asphalt shingles ranges 15 – 20 years.
- HVAC maintenance for regular twice a year checkup.
- Landscaping equipment. The average lifespan of a lawn mower is about 7-10 years. If you choose not to mow the lawn yourself, you need to budget for someone to do it for you.
- Pool maintenance if you have a pool.
- Home Improvement Projects. If you live in a cold climate like us, you may need to set up funds to regularly caulk the cracks in the driveway and stairs. At some point, you will have to spend a fair bit to have them replaced once the cracks are beyond minor repairs.
- Weatherproofing your house. This includes getting the necessary covers to protect your outdoor furniture and properly insulating your house for winter.
- Air filters for HVAC
2. Car Sinking Funds
Depending on the age and type of vehicles that you own, the costs of car ownership will vary widely.
Some of the costs include:
- Annual state inspection
- Annual registration fees
- Quarterly oil change and tire rotation
- Car battery. They typically last between 3-5 years.
- Car tires. How long they last depend on your driving habits and driving conditions. So it can range anywhere form 5 to 10 years.
- Wind shield wipers
- Other repairs if it is an older vehicle.
- Storage and parking fees for campers and RVs if you own one.
- Funds for a replacement vehicle (whether new or used).
3. Medical Expenses Sinking Funds
Even if you have health insurance, often times, you will still need to pay for co-pay and deductibles should you happen to fall sick.
Certain health condition such as diabetes and asthma also require regular prescription for insulin and inhalers. Unfortunately, such costs are usually out of pocket and can add up significantly over time.
Some of the costs to include in you medical sinking funds include:
- Copays and deductibles
- Prescription drugs
- Dental visits. Costs for braces, fillings for cavities, extractions, root canals or implants.
- Vision tests and eyewear such as glasses or contact lenses.
- Over the counter drugs such as Tylenol, Ibuprofen and Zyrtec.
- Medical Equipment such as crutches, wheelchairs or physiotherapy tools.
4. Kids Expenses Sinking Funds
The costs for kids will vary widely depending on your kids’ interest and age. Even for the same activities, the cost can vary widely depending on the skill level and the level of seriousness in participation.
For example, in soccer, the costs increases as you go from a recreational player to a travel team player. The costs can grow exponentially if you plan to become a professional sportsman. The average annual cost of raising an Olympic-level gymnast is around $15,000.
Some of the costs to consider includes:
- Fees for sports participation and enrichment lessons such as art, dancing or piano classes
- Equipment costs for sports or enrichment classes such as new soccer cleats, gym leotards and art supplies. Or they may need to upgrade to a better piano or get a larger violin as they grow.
- Summer camps.
- School supplies.
- Tutors for school work where necessary.
- Laptops and computers. As they get older, they may need to do more work on the computers and if you have more than one kid, you might want to consider getting each their own device so everyone can get their work done.
- Graduation and prom expenses. Some of the those class rings can run for a couple of hundred dollars!
5. Pet Expenses
Pets are a wonderful addition to the family. But just like having kids, there can be considerable costs to owning them.
Some of the costs include:
- Pet food.
- Pet Insurance. I have heard of pets that require costly surgery to remove tumors or treat urinary tract infections. Therefore, having a pet insurance could save you the stress of having to deal with big medical bills for your beloved pets.
- Medical expenses for routine check ups and vaccinations.
- Spraying and neutering.
- Pet training. If you just got a new puppy, it might be worth investing in pet training to avoid ruining your new couch or carpet.
- Pet grooming.
- Pet sitting or boarding when you go on holidays.
- Supplies and equipments. These include things like cat litter, fish tank and oxygen pump for pet fishes
6. Clothing Sinking Fund
Yes, we have a separate sinking funds just for clothes. This is not because we are fashionistas but rather it is because with three growing kids, our clothing budget just tend to go out of wreck as these kids grow like weeds!
Furthermore, my husband and I rarely buy clothes, but when we do, it does add up quite significantly. Therefore I like to have a sinking fund to set aside a small amount for it each month and not get a budget shock when we replenish our wardrobe.
Some of the costs include:
- Winter coats, gloves, hats and boots.
- Fall/Spring clothes.
- Summer clothes.
- Running shoes.
- Hair ties and accessories for the girls.
7. Electronic Devices Sinking Fund
Given the rapid changes in technologies, devices get obsolete no matter how well we take care of it.
In fact I still have my old iPhone 4! It still boots up but half of the applications that I use does not run on it anymore and it runs so slowly, I will probably go crazy trying to use it.
You can set up an electronic devices sinking fund to replace some of the following devices over time:
- Mobile phones.
- iPads.
- Laptops and computers.
- Wireless routers and modems.
- Gaming systems.
8. Travel Sinking Fund
Travel is a big part of our life. We enjoy traveling to visit our friends and family and to see and experience different parts of the world.
Honestly, traveling is not cheap. But in many cases, the expenses has been worth it as it has given us so many wonderful memories and experiences as a family.
The cost of traveling also vary widely depending on where you go and what you plan to do. For example, the costs of a one week camping trip in your state park is likely to be very much less than spending one week in Disneyland.
We typically set up a large catch all travel fund sinking fund to cover the following costs:
- Hotels, Airbnbs or campground fees.
- Car rental, train passes or bus passes.
- Entrance fees for attractions.
- Airfare or cruise tickets.
- Passport and visa fees.
- Travel Insurance.
9. Holidays, Birthdays, Anniversaries Sinking Funds
Holidays, birthdays and anniversaries are special occasions that encourages us to focus and celebrate with our family and loved ones.
Yet, at the same time, we must be mindful to maintain a balance between celebrating the occasions and not over-spending for these occasions.
The best way to avoid the commercialization trap of these holidays and special occasions is to set up a budget for them and resist the temptation to go beyond your budget.
For our holidays and birthday sinking funds, we save up for
- Family birthdays. This typically includes gifts, cake, a small party or going out for dinner as a family.
- Key festivals. Depending on your religious beliefs, you might have to follow certain traditions in the ways of gifting. These festivals include Christmas, Hanukkah, Chinese New Year and many others.
- Friends’ birthdays. This is a separate fund for times where your kids might be invited to their friend’s birthday party. We like to gift them something to help celebrate their special day.
- Valentine’s day and anniversary.
- Other holidays. This include holidays like Halloween and Fourth of July for example. We would have a small fund for decorations, sparklers and maybe a potluck dinner with friends and family.
10. Sinking Funds for Hobbies
Hobbies are great outlets to achieving joy and balance in life. We get to do things that we enjoy while learning new skills or doing activities that keep us active and healthy.
Like all other things in life, hobbies can be as expensive as you want it to be.
The main costs for maintaining a hobby are in the following two categories:
- Equipment costs. Are you into drones, fishing, biking or photography? Some high end equipment could go up to several thousand dollars.
- Learning costs. Usually we want to get better at what we do and that would involve some investments into training or books to help us improve our skills. If you are into yoga, you might sign up for monthly classes to keep up with your yoga flow.
11. Personal Care and Grooming
Personal care helps us look and feel better about ourselves.
Depending on your needs and interest, you can set up sinking funds for
- Haircut
- Cosmetic and skin care products
- Massages and spa visits
- Gym membership
Sinking Funds are a Game Changer
Having sinking funds in our budget has been a game changer on how we spend and save our money. It has helped stopped us from having the illusion of feeling rich when the expenses does not occur in a particular month.
It has stopped us from spending money that would be needed for something else a few months or a couple of years down the road.
Instead, now we are consciously setting aside the money that is needed for future expenses. In doing so, we also no longer panic and stress when it is time to fix the roof or get a new phone.