The Magic of Sinking Funds

When I first started trying to save more money, every month there seemed to be something that would keep me from being able to save as much as I thought I’d be able to.

Whether it was spending money on Christmas presents, my car registration, or an annual membership that came due, each month I found myself saying that “next month will be better, this month was just weird because of [insert ‘extra’ thing here].”

It didn’t take long to realize every month was a “weird month” and as a result, I wasn’t getting any closer to my savings goals. Enter sinking funds.

Sinking funds save you from blowing through your budget on “unexpected” expenses and getting disheartened.

Around the same time that I realized every month was a “weird month” I also realized there really wasn’t anything weird about these expenses that kept popping up. I paid them each year and I knew that they were recurring, I just wasn’t accounting for them in my calculations.

Sinking funds are categories in your budget dedicated to larger, anticipated — but infrequent — expenses. You determine how much you need to assign to that category each month so that you have the funds you need ready when you need them.

While sinking funds may be kept in a savings account until they’re ready to be used, they should be considered separate from your emergency fund, because the expenses are expected — and therefore not an emergency.I really understood the magic of sinking funds after I started using YNAB and their four rules. Between giving every dollar a job (rule #1) and embracing your true expenses (rule #2) those “weird months” become few and far between.

Here’s a breakdown of which sinking fund categories I fund each month and with what amounts.

Vacation: $120 per month

We prioritize traveling so this is usually a bit higher, but since we’re saving for a house this year (and Cassie is still navigating the transition to self-employment) this was an area we decided to cut back in a bit.

Moving Expenses: $100 per month

Moving is expensive, and since we anticipate buying a house in the (hopefully) somewhat near future, we want to be saving for the associated moving costs. Right now, I put aside $100 each month for this anticipated cost, but once the fund reaches $1,200, I’ll stop funding it.

Taxes: 20% of whatever my side income was that month

Since I’m considered an independent contractor for some of my side income, I need to set aside money from each check to pay the end of year tax bill. Since the vast majority of my income is taxed, I never get around to filing quarterly taxes. So, I pay my independent contractor taxes when I file my regular taxes at the start of each year.

Health Savings: $50 each month

This is money that I set aside for copays, prescriptions, jumbo packs of super soft tissues when I get sick, the occasional medical bill, etc.

Christmas: $45 per month

This is money that I spend primarily on gifts, but also on decorations and holiday activities.

Auto Maintenance: $35 per month

This covers regular oil changes plus various smaller expected (or at least anticipated) expenses.

Annual Subscriptions: $25 per month

This category funds several annual subscriptions like our Costco membership, YNAB, Amazon Prime, Chase Sapphire Preferred annual fees, and more.

Gifts/Giving (non-Christmas): $25 per month

We write out all of the birthdays and major events that we know of at the beginning of the year onto a paper calendar we keep in our kitchen. This fund allows me to give gifts without feeling stressed about it.

Vehicle Registration: $15 per month

This one also covers emissions testing fees and any other licensing costs I may have to pay that year.

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Now, on the rare occasion when I get surprised by an “unexpected” larger expense, I figure out the monthly cost and create a sinking fund for it. This keeps me from being surprised again the next year and it makes all of the larger expenses throughout the year feel more manageable.

PS — The YNAB link is a referral link, which means that if you sign up for a subscription at the end of your free trial, I’ll get a bonus free month. I wouldn’t recommend YNAB if I weren’t enthusiastic about it, and I think you will be, too! You can sign up for your free trial of You Need a Budget here.