Do you like being in debt?
I definitely don’t like being in debt.
Now, I know that some debt is unavoidable, i.e. I’m not rich enough to pay for a house in cash. But I don’t think something like taking a vacation is a good reason to go into debt.
So, how do I avoid going into debt when I want some time away, or to give more at Christmas? I use sinking funds.
What can you use a sinking fund for?
This method of saving up money can be used for almost anything. Below is a list of some great sinking fund categories for inspiration.
- What is a Sinking Fund and How to Set One Up
- Sinking Fund for Big Purchases
- Major Life Events Sinking Funds
- Saving Up for the Fun Stuff
- Unavoidable Expenses
- Final Thoughts
What is a Sinking Fund and How to Set One Up
A sinking fund sounds ominous. Or perhaps something that the Titanic should have invested in.
In reality, a sinking fund is essentially a savings account (or portion of a savings account) with a very specific purpose.
For instance, if you were saving up money for a summer vacation to the Bahamas, you could consider the location you were saving this money as a sinking fund. Whether that money is being saved in a separate account, a multi-use savings account, or a cookie jar.
The key factor in the setup and success of a sinking fund is accounting for each dollar.
So, while opening a separate account is ideal for a sinking fund, you can use an existing savings account, but you need to have a clear accounting of your balance and how much of your savings is for each goal.
For example, if you have a savings account with three sinking fund goals, let’s say a new car, a vacation, and the teeth whitening procedure your dentist has been trying to talk you into, you’ll need to know how much of your current balance is for each goal. And how much of your contributions go towards each goal.
Sinking Fund for Big Purchases
There are few large purchases that nearly everyone encounters at some point in their lifetime. These purchases are often ones that you can start saving up for a year or more in advance.
#1 – Home
Buying a house is the biggest purchase most of us ever make in our lifetime. And with the average home price sitting near $300,000, saving up enough money can seem like a daunting challenge.
Luckily, you only need enough for a downpayment. While 20% is the standard goal (so you can avoid PMI) depending on what type of mortgage loan you get, you’ll need a minimum of 3% to 5% of the purchase price saved up for a downpayment.
And don’t forget to add in some cushion for all those extra fees, like inspections, taxes, and closing costs.
Since this is usually a once-in-a-lifetime kind of purchase, you’ll likely have several years to plan and save.
#2 – Car
Another common high-priced purchase that most of us make at least once if not multiple times over the course of our lives is a new vehicle. Or in some cases, a new-to-you vehicle (i.e. used).
While you can save up the entire price of the car and purchase in cash, most people utilize an auto loan of some type.
Still, you’ll want to save up some cash. Having some cash on hand can help you avoid rolling TT&L into the loan and if you put a certain amount down on the purchase, you’ll likely qualify for better loan rates and terms.
#3 – Jewelry
Now you might be reading this thinking to yourself, I don’t even like jewelry, why would I ever want to save for that?
But, do you intend on ever getting married? The average cost of an engagement ring is $5,500. Then there are also the wedding bands to consider and perhaps even anniversary rings later on down the line.
Another jewelry-related cost worth starting a small sinking fund for is a class ring (high school or college).
#4 – Furniture
When my husband and I were first starting out, we got a set of couches from a friend who was moving across the country and didn’t want to lug them to the new house. I am unashamed to admit that we held onto those couches through two moves ourselves until they were just completely worn out.
When we had to break down and buy a new one, there was a bit of sticker shock involved.
Unfortunately, furniture just doesn’t last forever. And the high prices are a good reason to start saving up several months before purchase.
#5 – New Technology (Computer, Cell Phone, Gaming System, etc.)
Do you have to have the newest phone on the market?
Are you tired of plugging away at an ancient desktop and want to upgrade to a lightweight laptop?
Technology can be a great way to work, study, communicate, or just plain have fun. But the price tags can be pretty high. A new smartphone starts around $1000 and a new gaming system will set you back $300 to $500.
Instead of putting the purchase on a credit card, or worse, a contract with your cellular provider, try saving up with a sinking fund.
#6 – Secondary Vehicle
A secondary vehicle is one that you don’t intend to use as your primary source of transportation.
This could be a vehicle for a child that is turning driving age. Or maybe you are really into old cars and want a restoration project. And then there is that exhilarating wind-in-your-hair feeling that you can only get from riding a motorcycle.
Usually, these secondary vehicles don’t have as high of a price tag as your primary vehicle, but you’ll still want to save up some cash.
Major Life Events Sinking Funds
You aren’t the same person you were 10 years ago. Why? Because between then and now you’ve gone through many life events, small and large, that have reshaped you. Unfortunately, there is often a high price tag associated with these life events.
# 7 – Wedding
Congrats, you’re engaged and getting married. You’ve already set your date and picked out your venue, now it’s time to get saving.
Why? The average cost of a wedding in the US is a staggering $28,000! While that number may seem too high, consider all the aspects of a wedding. There are venue rentals, catering, flowers, attire, decorations, photographers, etc.
Everything about a wedding costs money, from the dress/tux you’re wearing to the chairs your guests are sitting on, even the person reading your vows gets a fee. And don’t forget about the honeymoon.
Even if you have family helping out with the costs, you’ll still want to put money aside for all those little things that you probably haven’t even thought of yet.
#8 – Fertility Treatments and/or Adoption
Growing your family can be one of life’s biggest rewards, but it comes at a cost. And for some, this cost start’s well before you get two pink lines on that pregnancy test.
Sometimes conception is difficult, and you’ll require the intervention of specialists. Unfortunately, these specialists don’t come cheap and their services are not always covered by insurance.
And adoption isn’t much better financially speaking. The average private adoption costs between $15,000 and $30,000.
If you know ahead of time that you might have fertility issues, you can start saving up money sooner, but if you are hit with unexpected news, you might be tempted to rush into fertility treatment or adoption ASAP.
As painful as it may be, take time and figure out your finances first. You don’t want the added stress of struggling to pay your bills while trying to conceive or care for a child.
#9 – Birth of a Child
Congrats, you’re expecting! Have you figured out how much the birth of your child is going to cost? Even with insurance, the average cost is just under $14,000.
Starting a sinking fund for birthing costs is great because you have a built-in hard timeline for your savings.
If you have the birth covered, you can still start a new baby fund to help you save up for all the essentials like baby gear, clothes, furniture for the nursery, and even diapers. And trust me, you’ll end up using every single penny of that fund.
#10 – Moving
Sometimes moves are sudden or unplanned and you end up going into debt (temporarily) to cover the costs.
But when a move is planned, you have the chance to start a sinking fund to save up some money.
If you are young and still living at home, plan ahead for your big move out of the house and use this low rent/no rent opportunity (if you have nice parents) to stash as much money away as you can. It’ll get harder once you’re on your own.
Or if you are planning to buy a new home at some point in the future, consider starting a separate sinking fund just to cover your moving costs and potential utility deposits.
#11 – Get a New Pet
Pet’s are pretty awesome. They offer you unconditional love and only sometimes poop on the carpet.
But that new puppy, or kitty, or baby chick (hey, no judgments) comes with some unique costs.
The most obvious is the vet bills. Just like humans, animals need to occasionally visit the doctor. And they may need high-priced procedures, i.e. spaying.
They also require their own specialized food and gear (i.e. kennel, terrarium, litter box, etc.).
So before you find a new furry friend to fall in love with, consider saving up for a few months to help cover some of the initial costs of pet parenthood.
Saving Up for the Fun Stuff
Not all of the reasons for starting a sinking fund involve paying bills, there are also some fun reasons to build your savings.
#12 – Vacation
What is your ideal vacation? A white sand beach? A hike through the mountains? Quiet time at a spa?
It can be fun to envision your perfect vacation, the relaxation, food, adventure. But if you are seriously considering making it a reality, you might want to start envisioning the costs as well.
Vacation saving is the best reason to start a sinking fund, as that perfect vacation you have imagined will make excellent motivation for saving up money.
#13 – Convention/Retreat
You might be thinking of a convention as a bunch of stuffy boring meetings and bland food, but many conventions are so much better than that.
Convention organizers like to host their events in attractive locations because it increases the likelihood of people purchasing tickets.
In addition to the price of tickets, you’ll want to consider the costs of transportation, food, and any extra activities into your sinking fund goal.
#14 – Throw a Party
Is it your turn next year to host the annual reunion? Did you promise your sister you’d throw her a baby shower for her firstborn?
Whatever your reason for throwing a party, and really, do you even need one, it is a smart idea to start saving up money now. Food, booze, and decorations all cost money.
In fact the bigger the party, the earlier you should start saving for it.
#15 – Christmas
Ah, that magical time of year. Seeing your children’s faces light up when they open their presents. The sheer joy they experience not knowing what it all costs.
FYI, it costs a lot.
Saving up for Christmas is another great candidate for a sinking fund. You should already have a good idea of how much you need to save (based on Christmases past) and you have a hard goal date.
#16 – Study Abroad
If you are young, single, and in college, this is a great time to get out and explore the world. And why not do it with a study abroad program.
These programs are great because you get to visit exotic destinations and have unique experiences all while, you know, learning stuff.
But, even though your school might cover some of the costs, you’ll likely be out of pocket a significant chunk of change.
Even if you land a scholarship/grant to cover most of the cost, a sinking fund can still be worthwhile to start so that you can cover any personal expenses.
#17 – New Wardrobe
Do people comment on your “retro” style? Are your clothes worn so thin that daylight shines through?
It might be time for a new wardrobe.
While I hate clothes shopping, for most people, getting a new wardrobe is something exciting. Especially if it is because you just landed a new job or lost a bunch of weight.
Clothes are expensive though, so if you have some time before you need to shop-till-you-drop, consider stashing away some money starting now.
#18 – Recreational Vehicles
You’ve got the house, you got the car, and now you clearly need a ski-do. Or an ATV for your deer lease. Or maybe a dirt bike, snowmobile, or four-wheeler to get your adrenaline fix.
The starting prices for a camper/RV can exceed the cost of a new vehicle. And have you heard that the word “boat” actually means “bust out another thousand”?
If you have your heart set on buying one of these high-priced big toys, you should start saving up several months if not years in advance. And be sure to consider the cost of insurance and where you are going to park the thing when you are not using it.
Now that we’ve looked at all of the fun reasons for creating a sinking fund, let’s explore some of the not-so-fun and often unavoidable expenses that are worth creating a sinking fund for.
#19 – Car Maintenance
While routine maintenance, like oil changes, tire rotations, AC tune-ups, etc. can be budgeted into your monthly expenses, you might consider starting a sinking fund for some of the larger vehicle maintenance costs that everyone has to deal with.
For example, new tires are often pricey, and every vehicle will need multiple replacements over the duration of its lifetime. Plus, setting up a sinking fund just for car maintenance can help you avoid drawing on your emergency savings for a sudden high-cost repair bill.
#20 – Home Maintenance
It is estimated that you should set aside at least 1% of your home’s value each year for maintenance. So, for a $300,000 home, that would be $3,000 a year.
Why not do this using a sinking fund?
If you roll over any unused portion each year and commit to adding the same amount every year, this fund can grow to help you cover unexpected high-cost repairs (i.e. new roof) or be used later on towards home improvements/remodels.
#21 – Planned Dental Procedures
Even when you have dental insurance, there are some costs that just aren’t covered.
Braces are probably one of the most common ones.
Thankfully, needing braces usually isn’t an emergency situation, and you can afford to hold off for a few months or even years.
If you, your child, or any other family member needs braces, once you’ve figured out how much your insurance will cover, you might want to start a sinking fund to save up for the rest.
#22 – Planned Medical Procedures
Unfortunately, medical bills are often unplanned, but on rare occasions, you know in advance that you’ll need a medical procedure and you’ll get an approximate estimate of how much it will cost.
Procedures that are planned include hip/knee replacements, birthing costs, plastic surgery, hernia surgery, etc.
While you might not have years to plan for the costs of these types of surgeries, you should have at least a few weeks or months to start saving up.
#23 – Property Taxes
Many people roll their property tax payments in with their mortgage payments, but if your home is paid off or you chose not to include your property taxes in your monthly mortgage payments, you’ll need to set aside money for this.
And be sure to keep current on appraisals so that you know ahead of time when your taxes are going up so that you can increase your savings as needed.
#24 – Income Taxes
If you are traditionally employed, and you have your withholding set correctly, then you’ll likely be looking at a tax refund, or at the worst a small tax bill.
But, if you have 1099 income, you’ll want to start a separate savings account, like a sinking fund, so that you can pay your quarterly tax bill. And it may be smart to always have a little extra in there come tax season just in case your earnings calculations were off.
#25 – Tuition/School Expenses
If you have children, then you are already aware that even public schooling is not completely free. There are school supplies, field trips, book fees, and more to account for.
Saving up ahead of time, i.e. during the summer months, can help lessen the blow of being hit by all the costs at once.
And if you are a college student, you can also use a sinking fund during the summer to plan for paying for your tuition, fees, and textbooks.
I have personally used at least 7 of these categories to start a sinking fund, though admittedly my accounting for each dollar could use a bit of work.
It’s also important for a sinking fund, to stick to your goal as if it were a budget because essentially it is. I have the hardest time with this for my Christmas sinking fund. There is a huge temptation to spend more since I already have all this money saved up. I mean, what’s $100 more?
Don’t do it. Spending beyond your set goal amount defeats the whole purpose for creating a sinking fund in the first place.
And while it is great to have multiple sinking funds (savings goals), try not to set up too many, or you could bog yourself down with all the accounting.
Setup correctly, a sinking fund is a great tool for avoiding debt while letting you enjoy all the fun stuff and happy moments life has to offer.