Sinking funds are a simple, but powerful, personal finance tool. Today, I’ll share some personal finance sinking fund examples so you can implement this powerful practice.
Except for a very brief period when we were hyper focused on paying down debt, we’ve never been great at budgeting. Instead, we practice the anti-budget and automate as much as we can. To make this work, we use sinking funds.
What Is a Sinking Fund?
Contrary to what it sounds like, a sinking fund is the opposite of drowning in debt. It’s an intentional practice of setting aside money on a regular basis for a larger anticipated expense.
It’s powerful for two reasons. First, you interrupt the cycle of being surprised by big expenses. When this happens, you end up paying for it with credit or drawing from your emergency fund. Instead, with a sinking fund you identify a large expense that you know will eventually arrive and plan for it. You are exerting intentional control over your finances.
Second, you flip the normal consumer experience on its head. Rather than borrowing on the front end and paying off over time you save up front and then buy at the end. This can save you a fortune in interest.
A sinking fund can be managed in a separate savings account or as part of your budget. Some budgeting tools allow you to allocate streams of money to certain purposes.
I prefer to create a separate account and actually transfer the money there. This helps with both tracking and money management. If I don’t build in actual separation, it’s easier to “dip into” a sinking fund.
An Example Sinking Fund Calculation
You know you’re going to have an expense of $1800 in four months. You want to set-up a sinking fund. You’re paid twice monthly, so you have eight pay periods to fully fund your sinking fund before the purchase.
Target amount: $1800
Time to Save: 8 months
$1800 / 8 = $225 / pay period.
For the next four months, you set aside $225 every time you’re paid. Four months later you have the $1800 you need to cover the expense! You pay no interest and take on no debt obligations.
Sinking fund power!
School District Example
Note: For a business or agency a sinking fund is set aside to pay off a bond or debt obligation. This article focuses on personal finance examples. Before we jump into those, let me share a real sinking fund example from education: construction bonds.
A school district sells long-term bonds to pay for construction of a new school. They create a separate account that they then fund to make their debt payments for the term of the bond.
Real Personal Finance Sinking Fund Examples
These are real sinking funds we’ve used. Some are one-time funds, others are ongoing.
We pay our car insurance every 6 months. We set aside $84 every month and when the time arrives, we’ve got it covered!
If you pay a mortgage and opt to have insurance and property taxes paid by the bank, then this sits in an escrow account. That is a form of sinking fund.
Since we’ve chosen mortgage freedom, we have to prepare for our property tax payment this year. We’re setting aside $500 a month into a high yield savings account so we can cover the bill when it comes due.
For the past two year we’ve used the Discover It cash back bonus to fund Christmas. The double bonus in the first year means you get 10% on certain quarterly categories. We hit those spends, and then used that cash to cover our gifts.
This year, we’ll be back to buying gifts. So, we set aside a little each month and then have a Christmas fund when the holiday season arrives.
Travel has always been our biggest budget buster. Next to the large home that we downsized, the largest part of our lifestyle inflation came from travel.
Now, when we want to take a trip we set a budget and create a sinking fund for the trip. Our last one was our $500/month contribution to our 20th anniversary trip.
We don’t currently have a travel fund due to Covid-19 restrictions and accumulated travel rewards points. We’ll definitely have another travel sinking fund in the future.
A two educator household spends on books! In our early years of marriage, buying books for our classrooms was a major budget buster. As elementary teachers we are passionate about providing high-quality text for kids.
We finally got it under control by starting a sinking fund for book purchases. It would build up over the year. We’d only tap it for small purchases until a major sale appeared, or if we switched grade-levels.
I wish we’d taken this seriously early on. Most of us know we should save up for major expenses, but we didn’t. Despite twice buying houses with 15 year-old roofs, we were still “surprised” when the replacement costs hit us.
Now, we set aside $100 a month into a major repairs fund for our house to cover expenses like roof and paint.
Other Common Sinking Fund Examples
Here are some other common sinking fund examples.
Sometimes, we can make things too complex with names. Yes, a college fund is a type of sinking fund. You know you are likely to have a larger future expense, so you save for it.
Want to really flip the typical debt cycle on its head? Prepare to pay for your next car in cash. Americans lose billions each year to car loan interest.
Set a target amount for your next car purchase. Start a fund and contribute a little bit each month to it. When your car needs to be replaced, you’ve got it ready to go!
This is challenging the first time, when you may be paying off a car loan already. When you eliminate that loan, use the amount (or at least part of it) to start the sinking fund for your next car.
This is another common sinking fund. If you want to buy a house, you need to save a down payment. 20% is ideal to avoid mortgage insurance and will get you the most benefit. It’s challenging with housing prices in many areas these days.
Set your target savings amount, automatically contribute a set amount each month. You’ve created a down payment sinking fund!
Appliances getting older or starting to worry you? Start a sinking fund for appliance replacement.
You think you’ll have to replace your current washer/dryer within the next three years. You go to Amazon and see sets like this one for $1800.
You can afford to put $75 into a sinking fund and are ready to buy a replacement in two years. Perfect use of a sinking fund!
Unfortunately, health care continues to be a major personal finance issue for most of us. An acquaintance had a joint replacement surgery coming and knew it would end up costing several thousand dollars out of pocket. She started putting away money monthly and was able to pay it off before her recovery was complete.
Wedding / Honeymoon
Most of us don’t have parents who can afford to pay for our weddings or gift us the honeymoon we may want. If you do – great! I wish we had, because we started our married life still carrying wedding debt.
Friends who were smarter than us started saving up for their weddings while planning and escaped with much less debt. That’s a sinking fund!
Your emergency fund can be a type of sinking fund, because when you’re first creating it you set aside money as you can until it hits your target amount. If you deplete it, you rebuild it.
But I separate it out for a very important reason: You don’t want to use your emergency fund as a sinking fund for other purchases! Instead, try to anticipate and plan for large expenses and use a separate sinking fund.
An emergency fund should only be accessed for a truly unanticipated expense.
Sinking Funds Are Powerful Tools
I hope these sinking fund examples helped you better understand the concept and gave you ideas for ways you can implement this powerful concept! The real sinking fund examples I shared helped us take charge of our finances and build our path to financial independence. Though we’ve simplified our finances considerably as we’ve eliminated debt and cut back on expenses, we continue to employ sinking funds.
How about you? What sinking funds have you used or would you consider trying?
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