How to Use Sinking Funds to Stabilize your Budget
“Budgeting won’t work for me - no two months are ever the same!”
When my husband and I talk about budgeting with others, this is often the first objection we come across. I get it - some months are “quieter” than others, like the month after the fall chagim, and some months have more expenses (looking at you, Pesach).
The difference in spending from month to month was one of the first hurdles we overcame when we took control of our finances. We quickly realized that we needed to create a budget that was relatively stable from month to month and that fit our real life. One of the most powerful tools we discovered on our debt-free journey was the sinking fund. They were a game-changer for us, allowing us to free up money in our budget each month and create a stable baseline, even when we had more “expensive” months.
So, what exactly is a sinking fund?
A sinking fund is a savings account set aside for a specific, known future expense. Instead of being caught off guard by big costs that are coming up - you know that Pesach comes every year, for example - you set aside small, manageable amounts of money each month.
This adds up over time, so when the expense arises, you have the funds ready to cover it without having to dip into your regular savings, blow your entire month’s budget, or resort to credit.
We’ve set up several sinking funds throughout our financial journey. For our family, online banking through Capital One has been a positive experience - we are able to get a high interest rate on the money we save, and we set up multiple accounts with specific names to make tracking easy.
While our sinking funds have changed over time, we currently have the following as a family of 3 with a pet. For each sinking fund, we estimated the amount we’ll need for the next year, then divided that amount by 12.
- Clothing
- Gifts
- Car Maintenance
- Car Registration
- Home maintenance (goal: 3% of total home value)
- Chagim
- Pet Needs
- Memberships (including shul and any subscription services, like Amazon Prime)
- Tzedakah/Ma’aser
- Taxes & Insurance
Here’s how to set up sinking funds in your budget:
- Identify Your Expenses: Start by listing any annual expenses that are coming up. These might include things like property taxes, extra food and gifts for chagim, or home repairs. Any event that doesn’t happen monthly but is a known, predictable cost should be part of your sinking fund plan.
- Set a Savings Goal: For each expense, calculate how much money you’ll need. Let’s say your car insurance premium is due in six months, and it costs $600. Divide that by the number of months until the payment is due (in this case, 6 months), and you’ll need to save $100 per month.
- Automate Your Savings: The easiest way to make sure you stay on track is by automating the transfers. Set up a separate account and allocate a specific amount each month for each sinking fund.
- Track and Adjust: Periodically review your sinking funds to see if you’re on track and add/remove funds as needed. At this point in our financial journey, we review our sinking funds twice a year.
Sinking funds take a lot of the stress out of big expenses and help you stay disciplined in your budget. With a little planning, they can make all the difference in achieving financial stability.
