You’ve got you’re budget set up, the bills are on automated payments and you have a debt repayment plan in place.
You know your next step is saving for the bills that don’t come nice and regular in sinking funds, but how much should you save?
How many sinking fund categories should you have? And where does an emergency fund fit in?
Getting your budget set up so it covers every financial action you take is a multi step process. And sinking funds can often be overlooked.
They can be seen as savings, something to aspire to do in the future, but actually they are critical to the success of your budget.
Sinking funds are for expected expenses that don’t happen conveniently every month. Whereas your emergency fund is for unexpected expenses that come out of the blue, when you least expect them.
Two very different situations, both requiring money already put aside for them.
Savings are for neither expected or unexpected expenses, instead they are for your long term financial security, growing your wealth and securing a comfortable retirement.
What should you have sinking funds for?
Sinking funds are for those parts of your budget that don’t happen every month or on a very regular basis. Think annual insurances, home renovations, Christmas and the like.
These bills are an integral part of your budget but they don’t conveniently happen at the same time every month. Nor are they conveniently the same amount each month or even every month.
The purpose of sinking funds is to have the right money available to pay these bills when they pop up, without going into debt or dipping into your emergency fund.
For an in-depth dive into sinking funds check out this post.
How do sinking Funds work?
Sinking funds are designed for you to pay into on a regular basis and you use the money in them whenever you have a bill for that category.
For example, you know vehicle repairs are going to cost you approximately $600 a year (I’m making the maths very simple for myself here!) so you save $50 every month into that fund.
You get a bill for $200 for some repairs so you withdraw the $200 and pay that bill. You keep paying in $50 each month because you know other repair bills may come along later in the year.
At the end of each year you can revisit your sinking fund categories to see if you still need all of them, whether the amount being saved is enough or too much, and recalculate what you put in them.
What’s the purpose of sinking fund categories?
Sinking fund categories are your way of breaking down your ad-hoc expenses into understandable pots of money.
If you just had one sinking fund then you have no way of knowing how much you are going to need to save for vehicle costs or pet costs and the like.
The more detailed your categories, the better you can budget for them.
When we first got our cats they had their vaccinations just after Christmas. For the following 2 years I forgot that their annual jabs were due.
This was during a time when £100 was a lot of money to me, a lot. And straight after Christmas was the worst time for me to get that bill, which of course could not be delayed.
If I’d set up my pet sinking fund as soon as we acquired our cats I wouldn’t have gotten a nasty shock 2 years in a row, nor would I have had to whack the cost onto my credit card and scrimp like billy-ho to pay it off the following month.
How much should I put into my sinking funds?
You can approach your sinking fund calculations in a few different ways.
You could gather all your old bills and bank statements for the past year to identify all those irregular costs. You could guesstimate these same irregular costs.
Plus you will want to factor in money for replacement items like white goods and a car. You can also use a sinking fund calculator which will help you work out how much to put away each month.
Extremely helpful when you are looking at a sinking fund for a long term cost such as a new car or a home improvement project. This is a good sinking fund calculator.
Why sinking funds are necessary
Your budget is not complete without an element for sinking funds. Your financial commitments do not stop at weekly and monthly bills.
Sinking funds allow you to put money aside for bills and costs you know you are going to incur. Without them you are going to either have some very lean months or worse you are going to have to take on debt.
Any loan or debt you take on will require you to pay it back monthly. Paying into a sinking fund monthly stops you from paying interest on the debt.
They keep you firmly in control of all of your money regardless of the bills that land in your inbox.
How should you organize your sinking funds?
You can hold the money you set aside for your sinking fund categories in various ways.
- In sinking fund envelopes, useful for low cost irregular bills that you know will are going to happen over the next 2-12 months. Sinking fund envelopes are like cash envelopes but they are not ideal if it involves a lot of money as it’s unwise to hold large amounts of cash at home.
- In one large, separate account (away from your everyday account). You’ll need some form of sinking fund tracker so you know how much is in each sinking fund category within this one account.
- In a few savings accounts created for your main sinking fund categories such as pets, kids and house.
In my ideal world I would have a separate account for each sinking fund I need. But let’s be honest, if you have even just 15 sinking fund categories you really don’t want 15 separate savings accounts.
What are the best accounts for sinking funds?
Having tried various ways to bank my money I have found that the best accounts for sinking funds are those that allow you to have separate pots within the same account.
You don’t need to open a load of different accounts with different banks. Just one account with sub pots.
Top 11 vital sinking fund categories
These are the most vital sinking fund categories in my opinion. Of course not all will apply to you but if they do then this is where you start.
Having these covered will stop you worrying about money and reassure you that you have got your budget well and truly drilled down.
Your home will cost you money, guaranteed. (Unless you rent, in which case your landlord will likely have a sinking fund for it!) You can foresee some costs but not all so putting money away regularly is extremely sensible.
Even brand new vehicles cost money to keep on the road. The older a car gets the more likely a few things will go wrong with it.
And of course at some point, however far off into the future, you are going to have to replace it. Why pay the interest on car finance when you can gain interest on your savings towards your new future car?
Young pets don’t often cost much money but you can still be unlucky. But as they age, they will cost you more as I can testify.
My 2 cats used to cost me less than £30 a month inclusive of insurance, food and vet visits. Food alone costs me more than that now due to a specialist diet.
You never know when they are going to pick up an injury or illness. Pets are family so money saved is essential for them and for you.
If you believed some of the figures that are used to tell you how much it costs to raise a child, you’d never have them.
- In the US the USDA reckons the average is $233,610.
- And in the UK the CPAG report similar huge numbers.
Whether you agree with them or not, I am sure you agree that kids cost money. Regular food costs are one thing but there are many other costs that pop up somewhat unexpectedly or at very short notice so a kid fund is an essential fund.
It happens every year yet still many people get caught out and end up with Christmas debt in January. Make this year the year you don’t have a debt hangover after Christmas.
When you pay your taxes, how often and how much is of course dependent on your country and your tax status. Suffice to say, all self employed people need to set money aside for their business taxes.
People with other income streams also need to consider whether they could end up being hit with an unexpected tax bill.
And remember, after your first year, many countries (like the UK) want you to pay some of your taxes upfront, before you file your tax return!
Unless you are having a year long clothing ban then at some point you’re going to be buying a few clothes.
The longer you leave buying clothes the more likely you are to have a bit of a splurge so a ring fenced sum of money that is only for clothes will keep you on budget. It will also stop you from overspending as you can only spend what is in this sinking fund category.
I am going to be positive and presume that travel in all it’s forms will resume at some point in the near future.
And when it does you can bet you are going to want to dust off your pandemic blues with a little travel and a vacation.
Most of us find a way to have a vacation, which isn’t a staycation, every year so we need to save money for this, every year. Not put it on the credit card.
non-christmas gifts & Celebrations
Christmas can be a big spending spree but it’s concentrated into a few weeks. The other 11.5 months can still involve a chunk of gift spending.
Birthday gifts, wedding gifts, celebratory meals, baby showers and associated costs like travel, cards and wrap.
If you have school aged children please do factor in friends birthdays and parties, you could end up with 30 invites in one year, for just one child!
If you’re in a country where medical bills are covered then this might be a category you don’t need. Countries such as the UK and Canada.
However, many other countries (the US being one) this is an essential and vital category for you to have set up and be funding.
You never know when you’re going to need medical treatment and as much as health insurance covers the vast majority of the cost, it is never 100%.
In the UK and other countries you might still consider having a medical fund to cover health costs such as dental, vision and complementary medicines such as physio & chiropractors.
The most essential sinking fund category of all
Your emergency fund. Completely separate from any other sinking fund, not to be used for irregular expenses, this should be ring fenced for emergencies only.
Start at $/£1000 but don’t stop at this level, keep adding to it until you have 3-6 months of essential expenses.
It’s not often called a sinking fund but that is essentially what it is, a specific fund for a specific purpose.
60+ sinking fund sub Categories for budgeting success
Not all of these are essential, depending on your life set up, your life stage and family circumstances. For example I no longer have any sinking funds relating to child expenses as both my girls are grown up and living independently.
Nor do I have any medical categories as living in the UK medical costs are not an issue.
However I do have sinking funds for taxes, house and vehicle costs.
I am also building up my pet fund after getting hit with a $4000 bill, of which only part was reclaimable. My cats are only going to cost more as they age being almost 14 now so my pet sinking fund needs to be much bigger than it ever previously was.
9 Sinking fund categories for your home
home improvement projects
Projects around your home whether you DIY them or pay for labor can quickly become expensive. If your plans are 2 or even 5 years out, start saving now, you’ll thank yourself for it.
Some insurers allow you to pay monthly for house insurance, but you’ll pay interest on that figure at the rate of 8-12%. Better to put money aside each month and pay the annual premium.
This is a new sinking fund I have now, having moved to a rural area without mains gas. Right now oil isn’t too expensive but usually it can cost up to £1000 to fill an oil tank. That’s a pretty sum of money to find at the start of winter.
Every home needs regular maintenance, some on a bi-monthly basis like window cleaning, if you can’t do these yourself. Annual maintenance costs like sanding and repainting woodwork and decking treatments all become easier when you have the money set aside already.
Maintenance is often small and regular costs. Repairs can be anything from a cracked window pane to a new roof. Most are not covered by your home insurance and urgent repairs need urgent access to money.
Depending on your country you may also be liable for property taxes on your home. Paying annually in one lump sum may well be the cheaper option.
Not all utility bills conveniently charge monthly. Water bills seem to come in all sorts of different billing lengths.
In the UK they used to be 6 monthly, then they changed and you could pay monthly but only for 8 months. I’m not even sure what they are now, but mine are on direct payment thankfully.
If you have bottled gas (this is a cooking option in rural UK) then you buy according to usage. Same goes for heating oil.
Furniture and appliances
Furniture and appliances last a long time but they rarely last forever. My friend in Colorado just dropped over $4000 on appliances due to 3 going wrong at the same time. Guess what? She had a sinking fund category for these.
Garden & Outside
Your garden can be an extension of your home so it makes sense to spend money on it at some point. Every home we have had we have extensively changed the garden.
Decking used to be very in and now it’s very out. Symmetrical gardens were in, now it’s more about wildlife and the natural look. Gardens cost money to create and to maintain, even if you don’t have grass.
6 Vehicle sinking find categories you may need
Annual or bi-annual vehicle insurance is cheaper than monthly payments because you have interest at 8-12% added to those monthly amounts.
But car insurance is not cheap and if you have more than one vehicle it get’s expensive real quick. This is a category you will want on an ongoing basis until such time as you can pay the annual payment without blinking an eye.
Cars need regular maintenance for their best performance. The more miles you drive, the mor maintenance they need. Items like tires wear out, wipers stop wiping properly (so annoying!) and batteries tend to go flat just when you don’t want them to.
repairs and servicing
Regular servicing prolongs the life of your car but the cost can add up. And repairs are required on an all too frequent basis too. It is still far cheaper to maintain a car your already have than buy a new one so keep this fund topped up.
licences, registrations & taxes
Different countries and states have different rules as regards to costs for licences, registrations and vehicle taxes.
Some are annual like the UK vehicle tax but it can be paid monthly or bi-annually, at an extra cost of course. The worst polluters can cost up to £2,175 every year and include Chevrolet, Lamborghini and Maserati’s.
washing (& detailing if It’s your thing)
Car washing is an easy DIY job which will save you money. But car detailing takes cleaning to a whole new level. Prices in the UK start at around £200 and rapidly jump upwards. If detailing is a must for you then a sinking fund makes sense.
Cars can last a very long time but eventually you are going to need a replacement vehicle, whether that’s in 5 years or 10 years. Car finance costs you more whether that’s in interest or by making you buy a brand new model.
Putting money aside for a new car when you don’t yet need one allows you to slowly build up a good sum of money, enough to mean you won’t need to finance next time.
6 Sinking fund categories for your pets
routine check ups
Routine check ups aren’t covered by any pet insurance and as your pets age they require more routine actions. Our cats at 13+ now require 6 monthly blood tests as well as their annual vaccinations and regular flea and worming treatments. These all add up.
emergency vet care
Pet insurance will usually cover emergency treatment but not always fast enough. When one of our cats needed emergency surgery on a dislocated knee it happened too fast for the insurance company to give authority for the bill to be sent to them.
So we had to pay it, all $4000 of it. Our sinking fund went overdrawn that day (so to speak). 6 weeks later the insurance company paid out but our share of the bill was still $600.
Touch wood, our boys haven’t developed health conditions requiring regular medication but it happens for many pets and the costs can quickly escalate, especially if your insurer stops covering it.
New pets often cost very little, it’s only now that I realize just how much my boys have the potential to cost. Of course they’re worth it!
specialist diet food
Taking on a pet for the first time you work out the costs you think you will incur, food being one of them. But what about specialist diet food? Have you factored this into your budget?
One of our cats (not the one with knee surgery) has kidney disease and needs a renal diet. This is 5x more expensive than his brothers food.
And many cats are fussy about specialist diet food so you can have a lot of wastage while you find a brand they will deign to eat. I think I have tried him on 10 different renal brands so far!
Many pet insurers do not cover dental costs, yet older pets often need dental work just as us older humans do. And it doesn’t come cheap, ask me how I know! Sinking funds will help you bear this cost.
boarding services, pet sitting & dog walkers
Working outside your home can mean the need for a pet sitter or dog walker on an ad-hoc or regular basis.
If you save for a vacation and manage to get away this year or next then you’ll likely need some form of pet boarding service. Boarding services can add hundreds onto the price of your vacation, especially if you have multiple pets.
8 Sinking fund categories for kids
I was always thankful that there are 10 years between my girls. Because the various school trips and activities they were encouraged to go on added up to quite a lot every year.
And that’s without the teenage school skiing trip. If you have more than one child at school you are going to want a sinking fund for all their various school activities and trips.
daycare and holiday daycare
The long summer break is going to cost you one way or another. Either you have to work and the kids are in summer camp or daycare, or you’re not working and paying out to keep them busy.
I’ve done both and to be honest the costs were not that different, basically both cost me a chunk of money I needed to have already planned for.
sports fees & specialist tuition
Dance, soccer, guitar lessons: your kids want to have them all but they cost money. Weekly lessons even if subsidized quickly add up if you have more than one child or your child participate in more than one subject.
With 2020 came many more families moving to homeschooling which doesn’t happen for free. Educational trips cost money as do at home supplies, books and paper the children need in order to complete their work.
college and university fees/support
I did not have a sinking fund for DD2’s college years (16-18) because I didn’t realize they were going to cost anything more than DD1’s costs.
DD1 probably cost me about £1500 a year whereas DD2 was over £600 a month, for 3 long years! A different college with complicated and expensive travel coupled with expensive supplies for her chosen field.
graduation & prom Expenses
These days 4 year old ‘graduate’ from pre-school, with a gown and everything, seriously!
Proms weren’t a thing when DD1 left school but they were when DD2, unbeknownst to me. So I hadn’t saved any money for prom costs because I wasn’t expecting one.
I have already reminded DD1 that she needs to be thinking about this because my grandkids are growing up fast!
clothes & shoes
DD1 has a great clothes buying strategy for her 3 kids. She saves up the money then has a big shopping spree buying them all a new wardrobe of clothes as they’ve grown out of many things.
She saves time as she does one big shop every few months and she knows exactly how much she has to spend because she has a ring fenced sinking fund category for this.
new baby expenses if you’re at that life stage
If a new baby could be in your future then put a little money away now. They don’t have to cost thousands but you’ll probably spend a good few hundred on your new arrival.
And of course Mom won’t be working for a little while so money will be tighter right around that time.
6 Sinking funds categories for you and your partner
If giving to others is important to you but you don’t do so monthly, you will want to have a separate sinking fund set up in order to stash your giving money away into.
Most life insurance policies require monthly premiums which is perfect, another line in your budget and an automatic payment sent up. Job done.
But if your policy is an annual payment then when it comes time to pay it could leave a hole in your bank balance.
clothing & shoes
No need to resort to your credit card when you’ve set up a separate pot of money that you can use when you need to purchase something new.
subscriptions & memberships
Club memberships are often an annual fee as are subscriptions. If you wanted to play golf you could be looking at $1000+ per year for club membership. That’s a tidy some of money to find, better to have saved for it every month don’t you think?
gadgets & tools
My husband is a man who loves tools. When he worked as a carpenter you can bet he had every tool he needed and (in my humble opinion) plenty he didn’t.
The smallest of tools can cost a lot of money so this is a sinking fund category we always had. If gadgets or tools are your thing, you’ll want one too.
When times are hard you may well forgo some self care treats, but you shouldn’t give them all up. You are important, looking after yourself is important.
Put some money aside for self care treats like:
- salon visits
- hair cuts
- beauty grooming products
- sports massages
- Weight loss programs
- home work out equipment
8 christmas sinking fund categories
This is the biggest Christmas sinking fund category you will want to put money into. Putting just $50 away every month will give you $600 for gifts without going into debt.
You can reduce the cost of holiday cards by buying them in January when on clearance but if you have a big family or regularly exchange cards with all your work colleagues the price quickly mounts up.
Festive decorations are part of getting into the festive spirit. We tend to decorate just one room of our house to keep costs down but even still new decorations quickly add up. And I don’t know about you but our outside lights never last more than a few years, so frustrating.
activities & events
Discounting 2020 when much was cancelled, most Christmases involve a lot of events and activities which can add up to a pretty penny. Save money towards them now and you can attend as many as you want.
Christmas is one of the most expensive times of year to travel. Yet it’s often the one chance we get to see relatives so we do.
gift bags & wrap
Gift wrap and bags all cost money. You can of course save a lot of money by buying these straight after Christmas when the stores are getting rid of surplus stock.
Your grocery bill can be a bit of a shocker in December, especially if you are hosting. Putting money aside each month means the bigger bills won’t be painful.
shipping & postage fees
Until 2020 I don’t think I had ever sent any presents by post so I was little worried about the costs when I realized this was my only option for many relatives. If you ship a lot of presents then this is something to put money away for.
6 Sinking fund categories for work and taxes
In some countries you have to estimate your taxes for the year ahead and pay them, while in others you have to stump up tax money in advance, based on what you earned in the previous financial year.
If you’re self employed it is essential you put aside money from every payment you receive, otherwise you’ll get a nasty shock when you have to pay your tax bill.
annual taxes owed
If you’re not estimating and paying taxes during the year you most definitely need money put aside to pay your annual tax bill when it comes due.
The UK basic tax rate is 20% and this would be the amount I would suggest you have put aside to pay your taxes, every time you receive payment as a self employed person.
When you work from home your laptop is indispensable. If it breaks you need a replacement immediately. You cannot afford to wait while you apply for a loan or overdraft. A replacement Mac is 1000+ and a decent PC is at least half that so you bet you need this money set aside.
home office furniture and supplies
More people are working from home now and realizing that being sat at your dining table for 8 hours a day is not good for your body. At work you had ergonomic designed chairs and desks with the right amount of space to spread out. Good furniture costs money.
And of course working from home means office supplies you took for granted are needed. Printers and ink, paper and pens to name but a few.
annual related business expenses
If your business includes a website there are costs there that need to be covered, web hosting, technical services all cost money.
As a website owner I have a quite a few subscriptions to plugins and the like to help me run my blog in the easiest, time efficient way. My email service provider and Canva Pro are just 2 subscriptions that I put money aside for each month in order to pay the annual bill.
Your accountant will be able to give you a full list of expenses that are tax deductible. They still cost you money upfront though hence the need for their own sinking fund.
Many professions have annual fees associated with their professional memberships. Architects, engineers and tradesmen all have professional guilds that cost money but help them secure contracts and business.
7 Travel and vacation sinking fund categories
Do you remember vacations? Maybe this year will be the year when you don’t have to think hard about whether you’re going to have to cancel yet again.
Vacations cost money, 2 weeks cost more than 1 and flying costs more than a road trip. It is pretty essential to have a vacation savings plan set up and a sinking fund for that money. Otherwise you’ll be paying for your vacation long after you come back.
The price of a rental car varies hugely depending on the country or state you are visiting and where you pick it up from. And of course you need to salt money away to include all the additional insurances that bump up the price.
airfare and hotels
The bulk of many vacations is getting there and staying there. You can get cheap flights but if you’re restricted by schooling then you’re going to pay much more. And of course hotels and holiday villas are always more expensive during school holidays.
Disclaimer: I’ve never been on cruise and never likely to either, all inclusive always available food is way too much temptation for me. But many colleagues have and my eyes would water at the cost of their holiday. Before you add in all the extras that are part of the cruising experience.
If you’re visiting another country the best way to see the best of what it offers is to take advantage of day tours and tour guides. They know exactly what to show you and where to go.
But they can easily cost a pretty penny, especially when you want to dive in deep and see everything the country has to offer.
An essential part of any vacation budget is to ensure you have the right travel insurance. Skiing and other winter sports require additional insurance.
If you are in another country you also need to ensure you have adequate insurance for your children and everyone’s health is covered. Repatriation by air ambulance for serious injuries costs in excess of £30,000.
staycation and summer activities
An exotic vacation might be out of your budget but staycations and summer activities do not come cheap. In fact I have found entertaining small children to be much more expensive at home than if we were on holiday somewhere else!
When my girls were younger I always put away for the long summer holidays, to keep them entertained and protect my sanity!
3 sinking fund categories for other Celebrations
Birthdays for immediate family, especially children can cost a pretty penny. Especially when they are at the age of inviting the entire class to their birthday party. Expensive times! Lucky kids only have one birthday a year so pretty simple to put money into a sinking fund category set up for birthdays.
Weddings are unknown until the date is set then you’ve got to plan out exactly what costs are involved in you attending as a guest. Gone are the days of a present and a new dress.
Now it’s overnight stays, hen weekends and a large bar bill. If you have more than one wedding a year, it can be as expensive as going on vacation!
While birthdays and weddings are the most expensive, other celebrations can cost you money too. Anniversaries, baby showers, Valentines Day and Easter can all involve meals outs, presents or gatherings.
4 Sinking fund categories for medical costs
I might complain about having too much rain being in the UK but one thing I won’t complain about is the free access to healthcare courtesy of the NHS.
In America it’s private healthcare and you have copay’s – your share of a medical bill – that you are required to pay. Definitely something to have saved money for on a regular basis.
prescriptions & over the counter medicines
Medicines cost money although buying generic where you can will lower the cost. But as you age you seem to acquire more ailments and therefore more medicines to be paid for.
And you tend to require them on an ad-hoc basis almost like a bulk buy of medicines! Painful to pay out if you haven’t got a little money put aside.
Dental costs for humans (as well as pets) can be cheap when it’s just a check up but expensive for anything else. Especially now all dental workers must wear full PPE as this cost is passed on to you.
Regular eye examinations are essential for ensuring you have the right prescription in your glasses. Eye exams don’t cost much and many places discount the price if you buy your new glasses or lens from them.
Of course it’s the glasses/lens that cost and if you have anything other than a basic prescription the price ramps up extremely quickly. I’m showing my age now I know but I now have varifocal lens.
I’ve gone from paying £100 to £400 for 2 pairs of glasses. And using the same frames works out no cheaper! Contact lens require a monthly prescription so another line in your budget to be accounted for.
What are your essential sinking fund categories?
The sinking fund categories that you need for financial success are going to be different to mine. Indeed they will change as your family and financial circumstances change.
I used to put money aside for our house insurance bill because I didn’t have enough flex in my monthly budget to cover the annual cost when the bill came. Now I can.
I didn’t have a proper sinking fund for my cats but I sure do now!
Get your sinking funds up and running now and see how much they improve your budget and your finances.
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Last Updated on 3rd March 2021 by Emma