If you find yourself getting stressed out when large expenses come up, you should consider creating sinking funds. By choosing sinking fund categories that work for your lifestyle, you will be prepared for most big expenses that come your way.
Before we jump into the sinking fund categories, let’s get clear on what a sinking fund is.
A sinking fund is a specific amount of money that you have set aside for a specified upcoming expense. Sinking funds, also known as “buckets”, are a great addition to any healthy financial portfolio.
When setting up a sinking fund, you decide on a goal amount of money that is appropriate for the given category as well as a time horizon for when you want to “fill” the fund. These time horizons can be short term or long term.
You may be wondering if a sinking fund is any different from an emergency fund. The answer is YES! It differs from an emergency fund in the sense that it is being saved for a specific/planned expense. Whereas your emergency fund is meant for unexpected emergencies.
You can have several sinking funds- each one serves a different purpose. Here are some examples of planned expenses you can cover with a sinking fund:
- A new tech device (phone, laptop, TV, camera, etc).
- A vacation (accomodations, flights, food, etc.)
- Car maintenance costs
- Medical expenses (planned surgery/ procedure, prescriptions, routine visits, etc.)
- A wedding
You’ll want to keep track of how much money you have in each sinking fund at any given time. Some banks, such as Ally, make this super easy. They have a savings buckets feature which makes it especially easy to set up recurring transfers.
In this post you will learn about different sinking fund categories that you should consider adding to your budget. Please note that you are NOT encouraged to use all of these sinking fund categories. Use them as inspiration to create a few categories that will work well for you and your lifestyle.
This post is all about sinking fund categories.
SINKING FUND CATEGORIES:
1. TRAVEL
Travel is a very popular sinking fund. We all know how expensive traveling can be. With plane tickets, accommodations, and dining out, the expenses quickly add up. Set small amounts of money aside each month so that you can save up for the trip of your dreams.
When creating a travel fund, it’s ideal to know your destination so you can plan appropriately. I recommend looking up average prices for plane tickets and accommodations at your planned destination. Then approximate how much money you will spend on food and experiences. Add up all estimated expenses to see the total goal amount for this fund.
2. CAR MAINTENANCE
Maintaining cars can be expensive. The older your car gets, the more expensive the service costs can be. From new tires to new brakes and everything in between, a car maintenance sinking fund will ensure you are prepared for anything. Consider the average cost you spend on car maintenance yearly when deciding on your target amount for this fund.
3. WEDDING
Do you know the average cost of a wedding?
According to Business Insider, the average cost of a wedding in 2019 was $29,000. This is a large chunk of cash! If you’ll be paying for your own wedding, you’ll want to start saving ASAP. Stay out of debt and have the wedding of your dreams, by setting up a sinking fund.
P.S. It’s important to consider the size of your wedding when planning for this fund. The bigger the guest list, the more you should plan to save!
4. HOUSING EXPENSES
This specifically applies to all of the homeowners out there! If you own a home, you know that unexpected costs can be a major headache.
Need a new water heater? Have a leak in your roof? You will have peace of mind if you have a sinking fund set up for these types of expenses.
5. ANNUAL BILLS
You know those bills that come around once (or maybe twice) a year? Things like your car registration, insurance premium, Amazon Prime subscription, credit card annual fees, etc.
If you’re anything like me, you don’t always keep track of all of these and sometimes they can catch you off guard when they pop up. Estimate how much you pay on these types of expenses each year in order to set up a sinking fund that will keep you covered!
6. PERSONAL CARE
Oftentimes when we make a budget and try to reduce spending, the first thing we cut out are personal care items. But if you enjoy treating yourself to a massage or a facial every so often, you should! If you enjoy highlighting your hair, you should!
Now, don’t get out of control and treat yourself more than you can afford. But if some of these things are important to you, you just need to make sure you plan for them. By making a sinking fund, you are factoring these expenses into your budget to ensure you aren’t overspending or going into debt when you feel like treating yourself.
7. MEDICAL
Medical bills can be outrageous. Even if you have insurance, you likely have to cover some of your medical expenses out of pocket. Use a medical sinking fund however you see fit. You can use it to cover routine visits and prescriptions or you can use it to save up for a planned procedure such as LASIK eye surgery.
8. GIFTS
Birthdays and holidays can quickly become expensive, especially if you are someone who enjoys giving gifts. This can cause a lot of financial stress, particularly around the holidays when you may be purchasing multiple gifts for multiple people. On top of setting a budget for times like these to ensure your spending doesn’t get out of control, having a sinking fund will help keep your stress in check. You will have money saved up for this purpose and can buy those gifts for your loved ones without feeling guilty about it!
9. TECHNOLOGY
We all know how expensive technology is. Even if you are someone who does not always need the latest and greatest, you will need to upgrade your devices at some point. By having a technology sinking fund, you will be prepared for this big purchase when the time comes. Whether you are in need of a new phone, computer, TV, or something else, your sinking fund will have you covered.
These are nine of the most common sinking fund categories. However, this is not an exhaustive list, so don’t feel restricted by it.
You can set up a sinking fund for anything. Maybe you’ve been eyeing a new couch or bed. Set up a sinking fund for that! Or maybe you want to create a fund for your pet’s vet bills. Go for it!
The beauty of sinking funds is that they allow you to fit the things that are most important to you into your budget.
They can also greatly reduce financial stress. Large expenses won’t feel like such a burden when you already have the money intentionally saved up.
This post was all about the most common sinking fund categories.
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