Implementing a sinking fund within our budget was easily the biggest game changer when we started budgeting and pursuing financial independence .
Why? It eliminated the need to dip into savings or go back into credit card debt when one of those expenses, like booking a flight for a summer trip, came up.
Setting up the sinking funds tracker (aka non-monthly expense account) got us out of the credit card debt vortex and gave us confidence in our monthly budget . We knew we'd have enough money to save for our savings goals while also covering all of the unforeseen expenses that come up throughout the year.
What Are Sinking Funds?
Sinking funds are a budgeting tool that you can use to save money for expected expenses over time. They work by setting aside a small amount of money each month or pay period, allowing your savings for those expenses to grow over time. This money is then used to pay for specific expenses or goals, such as yearly insurance premiums, car maintenance, gift spending, or vet bills. Sticking to a budget month in and month out can be overwhelming. But incorporating a sinking funds tracker into your budgeting routine will make you more likely to succeed.
A sinking funds tracker is an essential tool that allows you to monitor the progress of different funds you've set aside for various purposes. As you progress on your financial journey, your sinking funds tracker will serve as a constant reminder of the progress you're making toward achieving your goals. By keeping an eye on your savings and making adjustments as necessary, you'll be better equipped to handle any financial curveballs life may throw at you throughout the year.
How do I Track My Sinking Funds?
To track your sinking funds, you first need to determine the total amount of the expenses you're saving for and the timeframe in which you'll need the money. For example, if you want to save $1,200 for a yearly insurance premium , and you have 12 months to save, you would set aside $100 each month to reach your goal.
So let's walk through my step-by-step approach to setting up your sinking fund:
Step 1: Designate a savings account as your sinking fund. This should be separate from your checking account & emergency fund. When one of your sinking fund expenses come up like school related expenses, you'll pull the money from this account to pay for it.
Step 2: List out all of the expenses that don't occur every single month that you want to save money for. Some common sinking fund categories include:
- Vacation
- Home maintenance
- Car maintenance
- Medical expenses
- Holiday gifts
- Vet bills
Step 3: Estimate the annual cost you'll need for each of your sinking fund categories.
Step 4. Sum up the annual cost of all of your expenses and divide by 12. That's the total monthly amount you're going to contribute to your sinking fund.
Step 5. Save that monthly amount in your sinking fund every month.
Step 6: When one of the expenses occurs in your sinking fund like gift buying, pull the money from this account instead of from your checking or credit card.
To simplify the process, I've created a free simple tracker that you can use to track your sinking fund progress on a monthly basis.
Remember, the key to successful sinking funds is consistency. By setting aside money regularly, you'll be prepared for future expenses and avoid the stress of unexpected financial surprises.
Sinking Fund Example
Here is the sinking fund my wife and I used in 2015. It was a big year for us as we had a lot of travel to save up for, brought our beat-up 2004 Toyota Corolla to NYC from the Midwest, and had car insurance to cover for the first time since college.
We sat down and listed all of the expenses that we needed to include in our sinking fund tracker. We then totaled up the annual cost of those expenses. For us, it was $8,870 We then divided that cost by 12: $740 and allocated that amount each month to our separate savings account.
When we booked one of our flights for the many weddings we had to attend, we paid for the flight with our credit card, then immediately paid off the bill with the money set aside from our sinking fund.
Why Use a Sinking Funds Tracker?
A sinking funds tracker can be the simple solution to make your budget savings proof. By using one, you can easily set aside money for specific expenses or goals, ensuring you're prepared for them when the time comes.
The primary reason to use sinking fund trackers is to prevent any big surprise expenses. You're able to systematically allocate funds toward future expenses, like yearly taxes or holiday shopping. This way, you don't find yourself scrambling to come up with the money when these events inevitably occur.
Another advantage of using a sinking funds tracker is that it helps you develop good money habits. By setting aside a portion of your paycheck each month for your sinking funds, you're consistently working towards achieving your financial goals. Plus, it encourages you to make conscious choices about your spending and savings priorities.
Sinking funds can also give you peace of mind when it comes to managing those big ticket spending items. When you have a clear and organized plan in place for handling your upcoming expenses, it eliminates guesswork and reduces stress. With a tracker, you'll know exactly how much you've saved and how much more you need to reach your targets.
Moreover, a sinking funds tracker allows you to:
- Easily monitor your progress toward each goal
- Make adjustments to your savings strategy as your life changes
- Stay accountable to yourself by visually tracking your savings
Sinking Fund Vs Emergency Fund
A sinking fund and an emergency fund are both important components of a sustainable financial independence plan. While emergency funds are meant to provide a safety net for unexpected expenses like a roof repair after a storm, sinking funds are a way to save up for planned expenses that you know are going to happen throughout the year.
Sinking funds are useful for expenses that you can anticipate, but may not have the cash to pay for all at once. For example, if you know you'll need to pay for your car insurance in June, you can start saving for that expense at the beginning of the year by setting aside a little bit of money each month in a sinking fund. This way, when the time comes to pay that bill, you'll have the money you need without having to take on debt or dip into your emergency fund.
An emergency savings account, on the other hand, is designed to cover unexpected expenses that you can't plan for. These could include things like your children's medical bills after an emergency room visit, huge car repairs that surpass your annual car maintenance cost, or unexpected job loss. How much you save in your emergency fund will vary based on your job stability, the number of dependents you have, and your risk tolerance, but a good rule of thumb is to start with at least 3 months of expenses.
Having both types of these savings accounts is essential for building a sustainable budget. By having a sinking fund, you can plan for future expenses and avoid going into debt when that big trip to Europe comes up. And by having an emergency fund, you can protect yourself from unexpected money stressors and avoid having to take on credit card debt to cover those unexpected expenses.
Regularly Reviewing and Updating Your Tracker
It's essential to regularly review and update your sinking funds tracker to ensure that you're staying on top of your savings goals and large expenses that occur throughout the year. To do this, follow these steps:
Evaluate your progress: Check your current savings balance and compare it against your goals. Are you meeting your targets? If not, reassess and make any necessary adjustments to get back on track.
Review your categories: Ensure that your sinking funds categories still align with your plans throughout the year. As life changes, so do your money goals. Consider adding or removing categories as necessary.
Rebalance your contributions: If you find that you're consistently overfunding some categories and underfunding others, adjust your monthly contributions accordingly. This will help keep your savings on track to meet your goals.
Monitor your spending: Keep an eye on your spending patterns and make adjustments to your budget if you notice that you're having trouble saving your monthly sinking fund amount every month.
By following these steps and reviewing your sinking fund at least every quarter, you'll stay in control of your finances and reach your savings goals more effectively. Remember to make any necessary adjustments when needed and breathe easy knowing that you have all of the money you need saved in order to live your best life.
Get Started Today!
All in all, a sinking funds tracker is an essential tool for managing your budget and working towards becoming financially independent. And the best part? It's a system that's easily customizable to suit your individual needs and preferences. So, give it a try and start experiencing the financial freedom and stress relief it provides!
