Have you ever been in a panic when a bill arrives in the mail that you totally forgot about?
Maybe it was the annual car registration renewal. Your dog’s annual physical and dental cleaning. Or how about your annual business and personal taxes that are done by your accountant. Or maybe your car broke down and is in need of repair.
What would you do for the peace of mind knowing that all of your bills will be covered when they’re due? That’s where sinking funds come in.
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What is a sinking fund?
A sinking fund is a certain amount of money you set aside for a certain expense that usually comes up quarterly or annually. Your sinking fund is used to help manage your money.
For example, when you get a notice in the mail stating you owe $300 for your annual car registration, you’ll have money saved in your “Car Registration” sinking fund. This helps because instead of coming up with $300 at the last second, you’ll have saved $300 over the course of a year into your sinking fund.
Basically, a sinking fund is a saved amount for a planned expense.
Why do you need a sinking fund?
A sinking fund gives you peace of mind. There are things you’ll pay for once or twice a year that you may forget about or don’t have planned in the budget.
A sinking fund helps you save money throughout the year for that expense. The peace of mind that you get from a sinking fund makes it 100% worth to use.
What sinking funds should you have?
- Holidays (travel and gifts)
- Birthdays gifts
- Dental cleaning
- Auto insurance (if you pay every 6 months)
- Car repairs
- Car registration
- Annual taxes
- Pets annual physical and dental cleaning
- Home repairs
- Emergency fund
- School supplies
These are not all of the sinking funds you can have. Think of any expense that comes up quarterly, every 6 months or annually. These would all work for a sinking fund.
Or maybe you want to buy a car in cash in 5 years. You could create a car sinking fund. Buying your car in cash is such a rewarding feeling!
How much should I put into my sinking fund?
This is unique to each person, but there’s an easy way to find out how much you’ll need for each category. You probably have a ballpark idea of how much you will need for each expense.
For example, your pet’s annual physical and dental cleaning will be the same as last year (most likely). If the bill was $250 last year, save $250 for the current year.
250 divided by 12 months is roughly $20 per month. You can save $20 per month until your dog’s next vet visit to ease the cost burden.
Where should I park my sinking fund?
Your sinking fund should be kept in a place where it’s easily accessible. You don’t want to park your sinking funds in your 401(k) or IRA, for example.
Instead, you want to park your sinking fund in a high-yield savings account. Your local bank does not (usually) count as high-yield savings account because local banks are notorious for having incredibly low savings account rates (like .03%). Call your bank to see the savings rate for savings accounts just to be sure.
Here’s a great example of why you want to park your sinking fund in a high-yield savings account.
In 1 year’s time, a balance of $10,000 will earn about $10 in an account with only 0.10% APY. A different account also carrying $10,000 will earn $170 growing at 1.70% APY. Huge difference.
Here are a few high-yield savings accounts:
- Marcus by Goldman Sacs (APY: 1.70%)
- CIT Bank Savings Builder (current APY: 1.75%)
- Ally Online Savings Account (current APY: 1.60%)
- Betterment Cash Reserve (current APY: 1.83%)
*APY can frequently change. At the time of this writing, this is the bank’s APY. Check the bank to find up to date APY.
Do a bit of research to see which savings account works best for you. I personally wouldn’t sign on to a savings account if there were monthly fees or minimums. There are too many banks out there offering no fees and no minimums, so it does not make sense to sign on for a bank that charges fees like that.
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How do I set up a sinking fund?
Step 1: Write down which sinking funds you want to create. Look at your credit card or bank statements to see what expenses come up quarterly or annually.
Example of my sinking funds:
- Pet physical and dental cleaning ($300)
- Annual business and state taxes ($400)
- Dental cleaning for myself ($250)
- Christmas gifts ($200)
- Car annual registration ($350)
Step 2: Figure out how much you want to save for each sinking fund. In my opinion, more is always better. For example, you may save for a dental cleaning for your dog and later find out that he/she needs a tooth pulled, making the bill higher.
Step 3: Create a plan to save the sinking fund amount. Your plan can involve you putting money into the sinking fund monthly or all at once (if you’ve got the extra money to do so).
Earn extra money with a side hustle and put that money toward your sinking fund. For example, you can create a shop on Etsy and learn how to sell printables. Or you can learn how to make money online with freelance writing.
Any time I make extra money, I put it toward my sinking funds so I’m always financially prepared.
Example: You created a sinking fund for your annual vacation. You plan to spend $1,000 on this vacation. Plan to save $83 a month for 12 months into your sinking fund until the month of your vacation.
Step 4: Start the cycle over again when your sinking fund is empty.
My Top Pick: Ally
I personally use Ally and highly recommend it. My sinking funds are all parked within Ally.
Even better, Ally has a special feature specifically for sinking funds. Here’s a little screenshot of the feature.
As you can see below, you can even set up recurring transfers into your savings or use the Surprise Savings feature, which is similar to using Digit (but at no charge). Super Savings analyzes your checking accounts for safe-to-save money and transfers money into your savings automatically.
A sinking fund is a set amount of money you set aside for an expense. There are things you’ll pay for once or twice a year that you may forget about or don’t have planned in the budget. A sinking fund gives you peace of mind when those expenses come up.
Parking your sinking fund in a high-yield savings account lets it grow at a higher rate; typically 1.50% or higher. This is great because your money will earn money just for sitting in the savings account. Win-win!
If managing your money leaves you stressed, I recommend checking out my free resource library. There are a ton of printables and resources for you and they are all free!
Do you use a sinking fund? What sinking funds do you have?
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