15 Sinking Fund Categories to Add in Your Budget

Want to get your money in check and keep your finances in tip-top shape? Setting up sinking funds is like having a secret weapon for your budget. Let’s break down what a sinking fund is in plain English and give you some insider tips for making one.

Over the years, I’ve gained a lot of personal finance knowledge—much of it through trial and error. If there’s one thing I wish I had understood sooner, it’s the importance of having a sinking fund.

Once you’ve set up your budget, it’s crucial to protect it to stay on track financially. You want to pay off debt, save money, and still have enough for the things that matter most to you. Additionally, having a sinking fund helps you save for specific financial goals, whether it’s planning your dream wedding, buying a new car, or renovating your home in the near future.

For these reasons, having a sinking fund is essential. In this post, you’ll discover what sinking funds are, why they’re so important, how they differ from emergency funds, and explore various sinking fund categories to fit your financial goals.

What is a sinking fund?

A sinking fund is money you put away to pay for expected significant expenses in the future. I want to emphasize two important words: “expected” and “future.” It means that you’ll pay a good amount of money for this expected expense at some point in the future, and you want the money to be ready by then, so you don’t cut things off your budget or go into debt. 

Therefore, you’ll know at some point that you’d want to renovate your home, get married in two years, or perhaps have an extravagant vacation at the end of the year. These expected expenses require a huge amount of money, and you want to save up for them, little by little so that you can pay for them when the time comes. 

Sinking Fund vs Emergency Fund

One of the common questions I get about sinking funds is how they differ from emergency funds. I understand that it can be easy to confuse these two, but they’re different. 

An emergency fund is for that – emergencies. Emergencies are unforeseen and unexpected. It can be a job loss, emergency medical procedures, car repairs, last-minute travel, and urgent home repairs. 

An emergency fund is supposed to tide you over these situations so you can still afford your basic needs, live decently, and not get into debt while you try to get back up.

According to most personal finance experts, you need at least 3-6 months’ worth of expenses saved up as your emergency fund, or more if that gives you more comfort and peace of mind. 

A sinking fund is for big-ticket expenses that you know you’ll incur in the future. Instead of spending an enormous amount of money one-off for such expense, you’ll squirrel money away from time to time until you’ve reached your target amount, on or before your target date. Having a sinking fund allows you to financially prepare for such expenses so that you don’t get shocked by a huge bill, ruin your budget, and take up debt. 

With a sinking fund, you have a target amount in mind, a timeline, and a specific purpose or category. Meanwhile, an emergency fund is used for all sorts of emergencies, can be touched at any time an emergency occurs, and must be replenished to keep you prepared for the next emergency that may happen down the road. 

What Comes First: Emergency Fund Or Sinking Fund? 

Now that you know the difference between an emergency and a sinking fund, you probably wonder which you should build up first. 

I recommend building up your emergency fund and saving at least three months’ worth of expenses before contributing to your sinking funds. 

Why? 

Because anything can happen, life will throw curveballs at the most unexpected moments, and you don’t want to be caught financially off-guard.

For example, if you’re saving up for a significant home renovation, what if you suddenly lose your job, a family member gets sick, or your car suddenly needs urgent repairs? You’ll want to address these urgent situations first with your emergency fund. In short, you have a financial security net to ensure that life goes on with little to no stress because you have the cash ready for these urgent situations. 

According to Dave Ramsey, you want to save $1000 for a temporary emergency fund while you get your financial house in order. Then build a 3-6 months fully funded emergency fund before moving on to your next financial goal: putting money into your sinking funds. 

How To Set Up A Sinking Fund

Are you ready to set up your sinking fund? Here’s a step-by-step guide to doing it. 

1. Identify your financial goals

First is goal-setting. What do you want to save up for? If you can answer this question, those will make up your sinking fund categories or financial goals. Are you saving for a home improvement project, a luxurious international vacation, your dream wedding, or a car upgrade? You can set up a sinking fund if you anticipate this expense within a given timeframe. 

2. Decide on the target date and amount

Now you want to know how much money you need to save up and for how long. This gives you a specific amount and deadline to work with so you can be more focused and motivated. For example, if you want to pay for a vacation worth $10,000 that will take place ten months from now, you know you must save $1000 a month. With that, you become more specific with your goal and more likely to save money to reach your target amount and deadline. 

3. Prioritize your goals

What if you have a couple of sinking fund categories? Then, you need to prioritize. Move the categories around according to how urgent they are. The good thing about sinking funds is that you can move on to the next once you’ve completed one goal or category. That is why it’s essential to have a target date for each goal to decide which ones to focus on first. 

Related:

• How to Start an Emergency Savings Fund
• 9 Personal Finance Goals to Achieve This Year
• Financial Freedom Checklist

4. Decide where to put your sinking fund

Here’s one important thing to know about sinking funds: do not put them into a bank account that you use for paying bills or saving money. You want to keep it separate. In fact, I suggest that you have separate accounts for paying bills and saving money, as well as another account for your emergency fund and another one for your sinking funds. Keeping them separate allows you to track your financial progress for each. It also prevents you from accidentally touching an account that’s meant for a different purpose. 

So, where should you put your sinking fund? Here are your two best options. 

• High-yield savings account so your money grows with higher interest than a regular savings account. 
• Certificates of Deposit (CDs) are low-risk investments, moderately liquid, and offer higher interest rates. 

Sinking Fund Categories

Do you want to start saving for sinking funds but are still not sure how to start? Check out these sinking fund categories and see which makes sense or applies to your situation and financial goals.

1.   Travel or vacation

Whether you travel once or a few times a year, it’s undeniable that traveling can cost a good amount of money, especially internationally. It’s good to set up savings dedicated to travel to pay for airfare, accommodation, tours and activities, food, and shopping. 

2.   Home Improvement

Whether you want to expand your living room, create more rooms for your growing family, upgrade your kitchen appliances, or buy seasonal decorations, this sinking fund should cover those costs. 

3.   Home maintenance

This sinking fund will cover anything that helps to maintain your home’s good condition and prevent deterioration, from fixing leaky pipes, cleaning the gutter, and changing air filters to winterizing your windows, painting, and sealing. 

4.   New car

Want to buy a new car without getting into debt? Set up a sinking fund for it. The cost of a new vehicle can dent your wallet, so it’s good to have the funds available when you’re ready to make such a huge purchase. 

5.   Car repairs and maintenance

Apart from paying for the car, you also need a sinking fund for your car-related expenses. You’ll find the costs adding up quickly between tire changes and routine car services. Add to that damage that may be incurred due to accidents and calamities. A sinking fund devoted to car-related expenses is good for keeping your vehicle in good condition and preventing costly repairs or immature replacement. 

6.   Gadget upgrade

Some must upgrade their gadgets and electronics to keep up with their jobs. For example, if you work with computers as a virtual assistant, graphic designer, or web developer, your devices must be capable of handling your tasks so that you can be more efficient at your job. Set aside money for periodic gadget upgrades so you don’t need to make painful one-off payments. 

7.   Medical expenses

You may be covered with medical insurance, but there are instances when you need to pay for medical expenses from your own pockets. Your insurance may not cover certain conditions, treatments, and procedures. It could also happen if you exceeded your annual maximums or availed of healthcare services outside your insurance network. 

8.   Birthdays and holidays

Celebrating special occasions usually means spending money on food, gifts, and parties. Having a sinking fund dedicated to birthdays and holidays reduces financial strain and allows you to enjoy these moments fully. 

9.   Wedding

Weddings are expensive, and couples are better off saving for this day early to allocate funds properly for venue, food, photography, entertainment, and other logistics. Additionally, setting up a sinking fund allows more flexibility, as couples can adjust their budget depending on what matters most. 

10. Honeymoon

\Couples may want to set up a sinking fund for the honeymoon that follows their wedding. If they have their eyes set on a dream honeymoon (which usually means it’s going to be expensive), it’s best to start saving money for things like airfare, hotel, dining, shopping, and activities. 

11. Home down payment

Getting a new home is a significant goal for most people, and the first step to making this a reality is to save up for a house down payment. If you can save at least 20 percent of the home’s selling price, you can avoid PMI (private mortgage insurance), which adds to your monthly mortgage. 

12. Pet care

Taking care of pets is a huge responsibility, so having a dedicated sinking fund for pet care is wise. You can pull food expenses, toys, grooming, routine vaccinations, and urgent pet medical services from this fund. 

13. Personal care

Taking care of yourself also costs money, so it’s good to set aside money for this specific purpose. Whether you want to indulge in a relaxing spa experience, get facials and treatments, or buy makeup and cosmetics, you can spend money for self-care without feeling guilty.

14. Entertainment

If you enjoy going to the movies and concerts and hanging out with friends, you can set up a sinking fund for entertainment. Movie tickets, restaurant meals, and bar drinks can get costly, so a sinking fund will help keep your household budget intact even when you indulge in these things now and then. 

15. Taxes

One of the most essential sinking fund categories I like to save up for is taxes. Since taxes are not recurring monthly expenses, it’s easy to set them aside until tax season. But I learned my lesson not to wait but to start saving up for taxes early. Then I don’t have to rearrange my budget just to accommodate my tax payments. By setting aside a small amount, you can build up the funds you need for taxes over time, making it less stressful for you and your finances. 

Key Takeaways

A sinking fund, separate from your emergency fund and regular savings account, can help you manage your finances effectively. Decidethe sinking fund categories that apply to you and save for them. Putting away sinking funds for future big purchases helps you stay within your budget and prevents you from going into debt. As a result, you are more confident that you have the money to spend on things that matter most to you.