Our budget is not terribly exciting.
It is mostly fixed expenses. Rent is sent to the landlord at the first of the month. Car and tenant insurance comes out mid-month. And at the end of the month, I reluctantly send a big chunk of change off to student loans.
Non-negotiable, predictable items make up roughly 95 per cent of our budget. The remaining five per cent are a little more challenging to plan for.
At least, they were, until we started using sinking funds.
What are sinking funds?
A sinking fund is an account where you put aside a small amount of money over a period of time to cover the cost of an upcoming expense.
Perhaps the most common example used to explain how a sinking fund works is Christmas.
Instead of reaching for a credit card in November to pay for gifts, you start stashing away cash in a sinking fund in the summer (or earlier).
It doesn’t have to be a lot — $20 here, $50 there. The point is to let it add up over time so when it’s time to go Christmas shopping, you’ll be spending money you have.
Who wouldn’t like to start off the new year with a zero balance credit card?
How you format your sinking funds is up to you. Some stash the money away in a separate saving account, while others opt for physical cash in an envelope. The key is make sure the money is held in a place where it’s purpose is clear.
If it sounds simple, that’s because it is. Introducing sinking funds to our budget was easy and it has made a huge difference for us when it comes to planning for unexpected expenses
Our sinking funds
At this time, we have four we contribute to regularly.
- Car maintenance
Car ownership is expensive! A car sinking fund can be used to cover the cost of things like oil changes, switching the tires, small repairs, inspections and registration.
- Cat medical
If you’re a pet owner, you know how expenses trips to the vet can be. Even routine checkups and keeping a pet up to date on vaccinations can be pricey. We have two cats and this is what we do instead of pet insurance.
Some folks opt out of vacations on the debt-free journey. I get that. I still think it’s a good idea to have a travel sinking fund. In our case, this fund has been used for everything from paying for hotels on vacation to covering a tank of gas for a long weekend visit with family two hours away.
Birthdays. Weddings. Engagements. Baby showers. Housewarming parties. Life is full of occasions where gift gifting is expected. Setting up a sinking fund for gifts has definitely been helpful to us over the years.
Some people have a separate sinking fund for Christmas. We have done this in the past, but for now, we’re saving all our gift money in one account.
Sinking funds you might want to add to your budget
Thinking about adding sinking funds to your budget? Along with the ones listed above, here are a few others you could consider adding:
- Medical (if you have out of pocket expenses / co-pays)
- Car insurance (in the future, this is one I want to use. It would be great to pay it all up front!)
- Home repairs/improvements
- Membership renewals (I’m looking at you, Costco!)
- Taxes (if you expect to owe)
Sinking funds are amazing.
By stashing away cash over a period of time, they relieve stress from the budget when it comes to big purchases or less routine expenses. Using them effectively requires planning, but they can be easily tailored to meet individual needs.
I cannot recommend them enough.
Your turn! Do you use sinking funds? If so, what ones do you have?