Sinking Funds: What They Are and How to Start Them

Prior to our debt free journey, which began in November 2018, Dustin and I had maybe $500-$1000 saved at any given time. Worse than that though, if we had an emergency – like needing four new tires – we would figure out what bill we could push back paying that pay period so we could get the tires. Then we would wait until the next pay period to get caught back up.

It was messy and we were barely hanging on.

Queue finding out about sinking funds!

When I say these changed our lives, I promise you I am not exaggerating. Let me explain.

Sinking funds are savings funds designed for a specific purpose. Let’s take for instance a car sinking fund. When we built our car sinking fund, which was one of the first ones we created, we wrote down every thing we paid throughout the year for our car.

  • Oil changes
  • Tires
  • Registration
  • Inspection
  • Miscellaneous

Once we made the above list, we then figured out how much money we would need in each category.

  • Oil changes – three to four times a year – average $60/visit
  • Tires – we get our tires changed every 2-3 years (we drive a lot!) – average cost $600
  • Registration – paid once a year – $75
  • Inspection – Before you can register your car, you have to get it inspected. – $25.50
  • Miscellaneous – We wanted to have some money if “things” came up, and already we have used our fund when our windshield wipers stopped working, when I broke our back light and when we needed a new battery. – Let’s say you want $500 for miscellaneous.

You then add all of that up to come up with your car sinking fund amount. If you’re like me, you will fluff it up a little bit more. Or, maybe you know that within the next two years you will need to buy a car and you want to save $10,000 for a car. You could then add that into this car sinking fund or you could create a separate new car fund.

When you are first building your sinking fund, like this car one we used as an example, you might just want to save all the money at once. So you would pay all your bills first, take out money for food, gas, etc., then save all the extra money for this sinking fund until you have the set amount you want to have saved.

Or, in the case that you want to save $10,000 for a new car in two years and you get paid twice a month, you would take $10,000 and divide it by 48 (24 pay periods in one year times two years). So you would save $208.33 twice a month. Then at the end of two years, you will have $10,000.

When we first started our sinking funds, we were very basic. We had one for our car, life insurance and a small miscellaneous one. Now our sinking funds are a bit more advanced/broken up – car, life insurance, Florida vacation, taxes, dad’s 60th birthday, and miscellaneous.

If a priority in your life is to travel, then set up a travel sinking fund. Figure out how much money you want to save for an extended period, or per month, and just start it.

Sinking funds have not only saved us more times than we can count, but they turn an emergency into a minor inconvenience.

I’d love to hear about your sinking funds or methods for saving for them! Comment below and share your knowledge.

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