Everything You Need To Know About Sinking Funds

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Sinking funds are a part of budgeting that honestly changed our lives. Before I implemented sinking funds I could not figure out why month after month our budget failed.

Have your heard of sinking funds but you’re not sure what they are?

This video will give you an idea of what these actually are, where you keep them, and why you should be using them.

Irregular or unexpected expenses are often what blows up someone’s budget. They create a monthly budget but then a large expense comes along that was not accounted for and destroys the plan. This leads most people to think that budgeting doesn’t work.

Enter - sinking funds.

What are sinking funds?
Sinking funds are actually the key to fixing most budget failures.

a sinking fund is really simple
It is basically a savings account you contribute to over time in order to save up an amount to spend
This can be for big expenses, yearly expenses, or expected but irregular expenses

This allows you to be more prepared for those large expenses that happen throughout the year or at unexpected times.

Sinking Fund Examples
Some examples include a sinking fund for a trip you want to take, for car expenses like repairs, or for a bill you know is coming like 6 month car insurance.
Some common unexpected expense sinking funds include:
Car repairs
Medical bills
You know these things will eventually happen but you don’t know when.
Some common irregular expense sinking funds include:
Car insurance (you know it’s due every 6 months)
Property taxes (you know it’s due annually)
You know these expenses are coming down the road but they aren’t due right now. So instead of being surprised and pulling out a credit card you use a sinking fund to save up for them over time and pay them in full when the bill happens.

Where to keep sinking funds

This all sounds great! So how do they work in reality?

There are two methods for sinking funds:
1. You keep a record of the money assigned to each sinking fund category but all the money is in one pot in a savings account.
2. You create separate accounts for each sinking fund and then save money into them individually over time.
3. Create buckets inside a savings account with a bank like Ally which combines both methods - your money is in one account but it’s assigned to items within the account.

The best place to keep sinking funds is in a hysa at a bank like ally or any of the ones I shared in my video about high yield savings accounts.

This is money that you will eventually be spending so it needs to be liquid and readily available for you when you need it. But you always want to earn money on your money which is why a HYSA is a great option.

Hopefully this video has helped you better understand sinking funds so that you can implement this in your own budgeting method!

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