A sinking fund is a strategic way to save money for a specific purchase by setting aside a little bit each month.

I love sinking funds. Sinking funds give me a sense of security over and beyond my emergency fund. A sinking fund is a barrier to protect your emergency fund from known, yet sometimes unexpected (due to timing) expenses. For example, we know appliances and tires need to be replaced, yet need to be replaced at the most inconvenient time. Why inconvenient? Because we had not prepared and had other priorities.

After you have created a steady habit of monthly budgeting, begin a sinking fund – saving for those known future expense. Begin with the KNOWN expenses and yearly transactions like yearly insurance premiums or subscriptions. A sinking fund stabilizes your monthly budget by spreading out the ‘payments’ vs having to adjust your monthly budget to pay a larger bill. 

Admittedly, I would have a sinking fund for so many things that it could possibly result in no margin for the regular monthly expenses. When I first began thinking about sinking funds, I did a thorough analysis of ALL the things that needed to be replaced eventually: mattresses, furnace, roof, car, appliances, painting the house, car maintenance and replacement, bi-annual family reunion trips, etc. I would consider the average cost of all these things divided by its life expectancy, divided by 12 months to determine how much needed to be set aside every month. Not a bad idea, but few of us have that kind of margin (or want to) in our monthly budget. Yes, it is important to consider these things, but possibly a better way is to create large categories (house repair) as well as categories for yearly expenses (premiums, car registrations).

Here are four steps to get started on your sinking fund:

1. Begin with expenses you pay annually. These might include yearly insurance premiums, taxes, car registrations, retail memberships, etc. Take the amount owed yearly, divide by 12 and set aside that amount every month.
2. For other known, yet not set expenses, what can you or are you willing to set aside monthly to reach the goal? Consider a sinking fund for both car and home maintenance. On average, vehicles need new tires every six years. If new tires cost about $600, saving $100/year or $8.33/month. In addition, cars average $500/year in other repairs or maintenance. That would be another $41.66/month. Save $50/month and you have a nice little savings account that can be tapped into when needed. That is freedom!
3. Follow the same for other categories. For your family, consider:
   1. home maintenance
   2. kids school activities and sports
   3. summer camps
   4. vacations
   5. holidays
4. Create a system to track your savings for each category.  Your budget app, an excel spreadsheet or simply pen and paper record work. Some banks allow you to have ‘buckets’ within the savings account, where each deposit is separated into the designated buckets. Choose the system that works for your home and family.

Sinking funds can give you peace of mind and financial freedom. It is one more way to make YOUR money work for YOUR family.