Best Sinking Fund Categories Families Need to Put in Their Budget

You might be wondering: What are Sinking funds? Which Sinking funds are best for you and/or your household? Where does the term “Sinking Fund” come from?

I can answer all of that and more! Tune in…

Sinking funds are certain categories you budget for that you don’t necessarily need to use every single month. They definitely COULD be ones you budget for every month (like your mortgage/rent) but most of the time, it’s the extras that “sneak” up on you. Depending on you and your household, you might need a lot of categories for your Sinking funds.

I won’t bore you with too many details (unless you’re like me and are super nerdy when it comes to this stuff) but the term “sinking fund” comes from the 18th century when it was used to reduce the national debt in Great Britain (according to wiki). In the non-investment budgeting world, the term Sinking funds is used a little differently.

Photo by Sasun Bughdaryan on Unsplash

Top Sinking funds that you need to budget for as a family

1. Birthdays

2. Holidays

3. Vehicle maintenance

4. School clothes

5. Vacations

6. Allowance (or commission if you don’t do allowance like us)

7. Haircuts (these can add up!)

8. New vehicle(s)

9. Doctor’s visits

10. House payments

11. Retirement

These funds might differ for your family, but these are the ones I use for mine.

Birthdays

Typically we budget $50 per person on their birthday. This year, my oldest daughter turns 10 so we are going to do something really fun for her birthday. It will cost a lot more than $50, so I increased this Sinking fund for the year.

Holidays

I budget for Christmas and Easter usually. We’re not super big on Halloween in my family, but if you are make sure to budget for that as well. These holidays come every year but man, they used to sneak up on me when I didn’t budget for it. Once I made this intentional and started setting aside money for it every paycheck, it got a lot better for me. This is super important because so many people go into debt around the holidays because they didn’t budget for it.

Well, you take any leftover income at the end of the paycheck and set that aside. Depending on how important these Sinking funds are to you, you might have to put more into one than another. Here’s what I do when I budget for a sinking fund.

Vehicle Maintenance

I live in a place where I need to change my tires every spring/winter. This used to cost me only $60, but now it’s $100 each time. I also lump our yearly registration into this as well because again, where I live, it’s over $400 for one of our vehicles. It’s much easier to budget this throughout the year rather than in one lump sum!

School Clothes

Does anyone’s kids grow as fast as mine?? I’m sure that’s a yes 🙂 We bought shoes for my son at the beginning of the school year last year and he’s already grown out of them. Like literally busted out of them. Same with all their clothes! I do a lot of thrift shopping though, too, to keep this cost down Especially with clothes since my kids are so hard on things.

Vacations

We take vacations every year. Most of the time we take a staycation, but sometimes we will go out of state and do something fun. This takes a lot of planning to make sure that we have enough, but that’s what I love about taking vacations, the planning :).

Allowance or Commission

Like I said above, we don’t pay allowance, we pay commission to our kiddos. This goes into the budget as well because I don’t want to get to the end of the month where I owe the kids their commission for the month and not have the money!

Haircuts

Let’s be honest, my hair is the most expensive out of the bunch. This goes into the budget as well. My son’s hair grows like a freaking weed so his gets cut every 6 weeks or so. I stretch mine every 3 months now since it costs so much.

New Vehicles

This doesn’t have to be a new vehicle, but a new-to-you vehicle. This is going on the budget soon for us! Since this is such a big expense, it’s a good thing to get started on it early, especially if you won’t have a good trade-in once you need a car (like us!)

Doctor’s visits

We have a Health Savings Account but I still put some aside for this category. We’re not quite to the point where we can save the max every paycheck so putting it aside and contributing after-tax works okay for us.

House Payments

We pay this one monthly regardless, but I am quickly getting to 2 months ahead using this bi-weekly budgeting method. It’s nice to know that if something were to happen, at least we can pay our mortgage for a few months!

Retirement

If you are already contributing to your retirement plan, great! If not though, you may need to start setting some aside now! Retirement works best when you contribute pre-tax, but it doesn’t hurt to start socking some away in a savings account that you don’t plan on touching.

So how does a Sinking fund work?

Well, it’s fairly simple, take the amount of what you want to save, divide that by the amount of months you have to save, and voila!

For instance, Christmas: $1500/12 = $125/month or $62.50/paycheck. Birthdays: $250 ($50 each family member)/12=$20.84 a month. I do 12 months because I start saving the year before. If you’re not starting until January to save for Christmas, my recommendation is to divide by 10 months so you’re ready to shop by October.

To make a sinking fund work effectively, you will need to budget for these just like you budget for any other bill. You’ll need to adjust each month depending on your bills and if they fluctuate. Put them into categories just like you would any other bill.

Here’s what it could look like once you’re ready to start budgeting. Taking a look at this, the vehicle is going to be the most expensive. Unfortunately, $20k is on the low end and probably not even going to cover a new vehicle unless prices start dropping soon! Again, I won’t buy brand new and when I do buy I will have my car to trade in (hopefully) so overall I plan to spend only $20k. Maybe by the time I’m ready, the prices will drop…

Sinking Fund Amount to save Amount/month Timeline

Holidays $1,500 $125 12 months

Vacation $4,000 $166.67 24 months

Vehicle $20,000 $333.33 60 months

Birthdays $250 $20.84 12 months

Importance of a Sinking Fund

As you can see, a sinking fund is very important if you want to plan for bigger items rather than having them “surprise” you. There are still things that will sneak up on you, but this will get you a good headstart!

What kind of sinking funds do you budget for?