If you’re not 100% clear on what sinking funds are, let me enlighten you! Essentially, a sinking fund is a way to save money for something specific by setting aside money towards the fund every month. For example, you could have a “travel” sinking fund. You would contribute a specific amount of money, usually not much, toward that fund every month.
You can learn more about sinking funds in the article The Skinny on Sinking Funds, but in simple terms they are basically specific saving funds/accounts for specific savings goals. I’m fully on board with the notion of separating your goals into different accounts – I recommend 1 account for 1 goal. This helps you stay focused on achieving the goal and avoid muddying your savings for multiple things. Check out 5 sinking funds I use in my budget, as of right now!
5 Sinking Funds I Use in My Budget
Here’s a sinking fund I’ll probably never get rid of! Even when I don’t have any trips planned, I still find a way to consistently put money into my travel savings. Now, when I do have a trip planned, I’ll use the money from my travel savings to pay for things ahead of time.
Since I don’t have credit card debt, I put all travel-related expenses on a credit card that earns me points for hotel stays. I personally love the American Express Bonvoy Card. I then use the money in my travel sinking fund to pay the credit card in full.
Outside of any spending I do while on my trip, my goal is always to have the trip paid for before I leave. There was a point in my life when I would put vacation costs on a credit card, and it would take me months to pay off. Never again!
#2 Second Home in Palm Springs
I would consider this sinking fund more of a specific savings goal, but once I purchase my second home in Palm Springs, I’ll use the account to save for another down payment! I’ve been saving in this particular account for 3-4 years now.
Because owning a home in Palm Springs is a true life goal of mine, it felt fitting to start saving for it. I’ve had more pressing savings goals since I opened this fund, but that hasn’t stopped me from at least putting $50/month into the account. I’m actually using Betterment to save for this goal. The money that I deposit is invested to help me get more growth before I bite the bullet and purchase the home.
I recommend this strategy (contributing regularly to an investment account) when the goal is a few years out. This allows you to take advantage of any gains that come in the market during that timeframe.
#3 Car Pay Off
Last June, I was finally able to purchase my dream car! I took home a black Lexus RX350. I love that car! My intention at the time wasn’t to finance the car, but because my credit was so high, I was able to finance at a 0% interest rate!
This allowed me to keep the cash I would’ve put towards the car and make monthly payments. Obviously, this adjusted my budget drastically. I don’t recommend changing the game plan unless you know you can make the numbers work.
Anyways, now that the car is financed, I decided I want to proactively pay it off faster than the loan term. I don’t have to do this, because I’m not being charged interest for paying monthly, but I would like my budget to go back where it was before!
So, I’m leveraging Digit to save additional money for “Car Pay Off”. What I love about Digit is that it transfers small amounts of money out of your checking account and into your Digit account. It takes enough that you won’t miss but it adds up over time! Every time I have an additional car payment saved, I’m going to put it towards my car loan!
#4 Annual Expenses
One of my most effective sinking funds is my fund for annual expenses. I calculated out what the monthly cost was for the expenses I pay annually and have that amount deposited into this fund. That way when the time comes to pay the bill, I’m not scrambling or hurting my budget.
If I come into extra money, I transfer it into this fund so that I can keep the monthly transfer amount in my checking account. I never want to have to worry about not having the money to cover these costs, so I’ll save for them as quickly as possible.
#5 Medical Expenses
My final sinking fund is for medical expenses and I’m saving for this through my H.S.A. I’ve been contributing to this account for years, so I’ve built a nice little cushion. I’m pretty healthy, but I do have to pay for contacts on a regular basis. Sometimes, I’ll also have to pay for co-pays and prescriptions. My savings allows me to do so with ease!
The beauty about sinking funds is that you can tailor them to your liking! No one person’s sinking funds would ever match 100% because we all have different goals and needs. Get creative with sinking funds and start saving for things you know you’ll be spending money on! Do you currently have sinking funds? Drop a comment to share which funds you have set up!