Have you ever heard of Murphy’s Law?
It goes something like “Anything that can go wrong and will go wrong at the worst possible time.”
Have you ever dealt with Murphy’s Law with your finances?
Like the day your ancient home HVAC system finally kicks the bucket to the tune of $8,000?
Or you really want to take vacation, but you don’t have enough this month to cover it without leaving balances on your credit cards?
While an emergency fund can help with some of this, this is definitely the job for a sinking fund.
What is a sinking fund?
A sinking fund is money that you’ve set aside for situations that are large, expected, and irregular.
This sinking fund will prevent you from overspending your monthly budget or draining your emergency fund for an expense you saw coming.
In this way, sinking funds allow us to be proactive, rather than reactive, to big financial surprises.
Wouldn’t it be nice to have a car repair fund waiting for you when you need an oil change twice a year or you blow out a tire on the highway?
Or a place to save up for your holiday gifts without bankrupting your budget every December?
Where should I keep my sinking fund?
There are some important rules to follow when you’re setting up your sinking fund.
Your sinking fund must be easily accessible.
Do you know the day that your oil change light will come on?
Or the date you’ll fall in love with your dream home and need to access your down payment?
Unless your crystal ball is more accurate than mine, the answer should be no.
You need to place your money into a location where you can easily access it- without incurring penalties for taking it out early.
Your sinking fund must not be in a high-risk place.
Did you pull out your money at the perfect time before the stock market crashed last time?
Don’t place your sinking fund into a high-risk investment.
You can lose ALL of it, and then you’re not better off than when you didn’t have a sinking fund.
The safest place for your sinking fund is a good old-fashioned savings account.
A savings account checks all the boxes.
It’s easily accessible, and you can take your money out fee-free at any time.
It’s not high-risk, so you won’t lose it in a stock surprise or an economic downturn.
And for an extra bonus, savings accounts pay an interest rate (even better if it’s a high-yield savings account)!
How Much Money Do I Need in My Sinking Fund?
This answer is definitely up to you.
Do you know you’re eventually going to need a new refrigerator, and you’ve already picked one out?
Easy answer: the price of the refrigerator is the goal for your sinking account.
Are you planning a vacation with only some vague ideas?
Do some research, set up an approximate realistic trip budget for your travel, add in some wiggle room for extra expenses, and your number is set.
Are you expecting that your car is going to have some type of expense next year because it’s had an expense every year?
Take an educated guess and start saving towards it.
If your guess is too high, save the rest of the money for another sinking fund.
If your guess is too low, thank yourself for saving something towards your goal and find a way to pay off the extra expense.
Where Should This Money Come From?
Remember that budget you’ve already built?
If you’re saving a little bit at the end of each month or paycheck, add another line item for your sinking fund.
Let’s say that you expect your next car repair will cost about $1,000 because most car repairs cost $1,000.
If you have room in your budget, set aside $50 or $100 each month into that sinking fund for your car repairs.
If your income or expenses are a little less consistent, set aside whatever you can.
Maybe consider a savings challenge where you set aside every $5 bill you come across.
Or pick up a side hustle, like driving for Uber one day each week, and put your earnings straight into your sinking fund.
Which Sinking Funds Should I Have?
Naturally, sinking funds are personal to your situation, and what benefits someone else may not benefit you.
Here are a few of the most common types of sinking funds:
Do you have a car? If you do, you need to save up for regular maintenance AND repairs when something inevitably breaks down- plus renewing your license plates and your driver’s license, any tickets you may incur, and anything you want to add onto your car.
Looking to buy a car? Whether you’re looking to buy new or used, you’ll have to cover a down payment plus all of the tax, title, and fees that are tacked onto the end of your purchase. And then you need to start saving for everything listed above!
Looking to buy a new home? Sinking funds are perfect for down payments. Figure out your budget and how much house you can afford and start setting aside little bits until you reach your goal.
Already own your home? The rule of thumb is that you’ll spend about 1% of your home’s purchase price on maintenance every year. So if you bought a $150,000 house, your sinking fund goal should be at least $1,500 each year.
Looking to sell your home? Start planning and doing your research on all of the associated costs, including home prep, cleaning teams, and realtor fees. They can add up!
If you have a pet or you’re thinking of getting one, set up a sinking fund for the expenses you can predict and the ones you hope never happen. You’ll want to set aside money for routine care, emergency vet care, prescription medications, pet sitting and boarding, pet toys, bedding, and treats. If you don’t know what expenses to expect with your pet, contact your veterinarian and ask- they’re experts!
Remember Murphy’s Law from above? It applies to your laptop and your cell phone too. If they’ve started letting you know that they’re getting ready to die, plan ahead and save for your next one. A $500 cell phone or a $1,200 laptop take a long time on a credit card with a high interest rate.
Planning a solo trip local or a family trip abroad? Do your research on your transportation, expected costs on your adventure, and add in some wiggle room for souvenirs and treats. Don’t forget to include any passport or travel insurance costs in your budget!
Birthdays and Holidays
Do you always get to December and think “I’m going to end the year broke?” Make a list and set an approximate budget for each person that you’ll need a gift for- and do it EARLY in the year. Don’t forget gift wrap, shipping, and postage if you need them! Then divide that budget by the remaining number of paychecks you have, and see if you can move that into a sinking fund before you need it. Then enjoy your year without being bankrupted by gifts!
It goes without saying that kids can have an unpredictable impact on your budget. Plan ahead for your summer camp fees, summer daycare, sports activity fees, and back to school expenses to save yourself trouble.
Planning on a new baby? Start your sinking fund as soon as possible to avoid straining your budget when your new family member arrives!