Creating a Sinking Funds Plan: Tips for Effective and Goal-Oriented Saving

Creating Your Sinking Funds Plan

House Fund

A house is probably the most expensive purchase you’ll ever make.

Depending on where you live it might be hard to get into a house at all with the market. My little town blew up post-covid era so I’m sure glad we bought when we did. Buying a house might not be for everyone, but either way, you’ll want some type of house fund for wherever you decide to live.

Traditionally a mortgage has required a 20% down payment. The median home price in the United States is $412,000 (according to this Forbes article). Along with that, the average interest rate is 7.63%, which would put the average person’s down payment at $82,400 and a monthly mortgage payment of approximately $2,718.

That… is A LOT of money! So you can see why it is important to save up to purchase your house. Also, if you are a first-time homebuyer, you can take advantage of some programs that might get you tax breaks. Check out your state to see if it offers any programs for first-time homebuyers!

You also need to consider extra closing costs when buying a house because you normally have to pay these out of pocket as well. Some mortgage lenders will let you roll it into the loan, but that will make your mortgage payment a lot higher.

Vehicle Maintenance

This fund is another essential one to have at all times, but it also depends on how old your vehicle is. You will need to adjust how much you keep in this maintenance fund than you would normally. When I say maintenance, I encompass everything into this. For example: yearly registration, new tires, insurance, oil changes, and changing out my tires (because of where I live I have to put winter tires on and then switch back in the spring).

You can easily calculate these costs because they’re normally the same year after year. Bigger items that could happen (like I had an oil leak recently) are harder to account for but my suggestion for this is fire up the old Google and see what the average cost is. Or call your local mechanics and ask what their prices are for higher ticket items.

New Vehicle

A vehicle is in the top 5 of large purchases, and you’ll make several over your lifetime. Luckily, when you’re shopping for yourself you’ll have more choices and can pick exactly what you want! I used to have a Toyota Camry and it was my favorite car ever! It was big enough to have a comfortable road trip in but small enough that I could squeeze in tight corners and the gas lasted a long time!

The amount you save for a new vehicle depends on what you want and if you plan to get a loan or pay in cash. Interest rates are very high on auto loans as well, so my recommendation is to pay in cash. If you take out a loan, make sure you don’t take out a loan for longer than 48 months. If you go longer than this you’re likely to get upside down on your loan and owe more than it’s worth. This is especially true with vehicles because they don’t appreciate, they depreciate!

Vacations

Vacations are probably the best sinking funds examples I can think of! Everyone needs a vacation, even if it is a staycation like the ones I posted about here.

We took a big vacation last year to Universal Studios in Orlando and had an absolute blast. We combined it with a wedding trip so the overall cost of the trip was high but we paid for it all in cash and didn’t go into debt!

Life is short and you need to take advantage of the wonderful world we live in! Our vacation fund as a family is about $5000. This will cover our flights, hotels, and tickets to whatever recreation sites we find. As the kids get older, we will raise this amount. You personally though could take a vacation for $1,000 or less! Better yet, grab a friend and go on vacation.

Retirement

If you want to save extra and max out your contributions, you need a retirement sinking funds plan ASAP!

You may not be able to max out your contributions via payroll to a retirement fund. That’s why I recommend a separate sinking fund for retirement. Even before I had a family and all of life’s bills that go along with that, I still struggled to save for retirement. But the earlier you start the better you will be!

If you have an employer that will match you on contributions to a retirement plan, you especially need to take advantage.

The reason I say to have this as a sinking fund as well is so you can set aside any extra income that you can to put toward this as well. There are two types of retirement funds that you can plan for: pre-tax, and post-tax.

Pre-tax contributions are called a traditional IRA (individual retirement account) or 401k. This means you get a tax break now because it lowers your taxable income when filing taxes.

Post-tax contributions are called a Roth IRA or 401k. The difference between a 401k and an IRA is that a 401k is sponsored through an employer, whereas an IRA you can open anywhere and completely on your own. So, if you set aside money in a sinking fund, you can contribute this to an after-tax Roth IRA and still take advantage of some tax breaks.

You never know what your life will look like at retirement, so it’s better to start saving now!

This sinking funds plan is important regardless of where you are in your life or how old you are.

You might be wondering… HOW do sinking funds work?

Think of them as dedicated savings accounts. You also need to account for them in your budget. This is the most important part. Take your extra income at the beginning of the month (or paycheck, however you do your budget) and split it out into categories.

Sinking Fund Categories Amount Per Month Goal Amount Time frame

House Fund $333 $20,000 60 months

Vehicle Maintenance $167 $2,000 12 months

New Vehicle $278 $10,000 36 months

Vacations $167 $2,000 12 months

Retirement $333 $6,000 18 months

Make this fit you and your budget. These are random numbers I threw out there 🙂

Key Takeaways for Creating your Sinking Funds Plan

These sinking funds examples are literally that–examples. You will need to figure out what works for you in your life. I completely understand it also depends on where you live. I live in one of the most expensive states so we are feeling it everywhere! The bottom line is you will be better off if you start thinking about saving sooner rather than later.

Sinking Funds are easy ways to save for things that you want instead of getting to the “ready” point and not having any cash to use.