How to Create a Sinking Fund
So, just some quick background on what a Sinking Fund is. A sinking fund allows you to save for certain expenses over a long period of time vs being caught by surprise when an expense appears. I have a whole post that highlights the reasons WHY you NEED to start a sinking fund. If you’re questioning why you need be building this cushion in, go to that post and read up!
If your budgeting goal is to pay off debt, nothing can be more frustrating than back sliding on that goal. Trust me. I’ve been there! Honestly, just typing this I’m having flashbacks to poor decisions we made in the past because we had nothing to fall back on when an sudden emergency struck. We are finally in a place with our budget where we do everything we possibly can to avoid this and we have gotten pretty good at it. So I have compiled all my own tips and tricks for thinking through and setting up your own sinking funds as well as a tracker spreadsheet you can download to use in Excel or Google Sheets.
The first thing you want to do is think ahead to anything you have coming up over the next year that is going to end up costing you a little extra. Think about months where you have multiple events that pile up and nickle and dime your wallet or major bills that come due once a year. Also, be honest with yourself and realistic in your spending habits. Things like birthdays and anniversaries are easy to overlook when you’re on a tight budget and spending as little as possible, but factor them anyway. When you get down to it you might need a little extra to cover a dinner or present, if you don’t use it you can always roll it into something else.
There are so many different things you could create a fund for. Check out the list below to help tickle your brain.
ideas for sinking fund items:
- Property Tax
- Zoo/Aquarium Membership
- Amazon Prime Membership
- New Tires
- Car Repairs
- Home Repairs
- Kid’s Sports
- Family Trip
How to Calculate the Funds
Once you have an idea of the things that could pop up this year and catch you by surprise it’s time to spreadsheet it up! Go ahead and download my sheet HERE or get crafty and make your own.
Basically, we’re just going to list all the items you’re looking to fund in the first column. Then add the goal amount for how much you want to save in another column. Next, we are gonna to do some math, baby! You just divide the goal amount by however many months (or paychecks) you have until you need that goal money. Feel free to round up, or down… whatever makes sens to you and gets you to that goal. Then you can go ahead and add that in a column for amount per paycheck.
At it’s most basic, that is pretty much it. You can add calculations in whatever way make sense to you, but this is pretty much all you need.
Where to Keep your Funds
To me this is a general preference thing. Keep your money wherever feels the safest to you AND safest from you. For some people that means creating envelopes for each of their funds and pulling out cash to add to those each payday. For me personally I have a separate savings account where I store all mine in one big lump. I opened an online savings account with Goldman Sachs because their interest rate on a regular savings account is 2.25%. Since this money will mostly be sitting around I figured it could go ahead and make some money babies while it’s waiting to be used.
I like to leave the funds alone as long as possible, and if I do spend out of the fund I try to be as thrifty as I can be. At the end of the year anything left over is either rolled forward into the next year’s funds, used a bonus debt snowball payment, or spent guilt free.