Sinking Funds: taking Budgeting to the Next Level

Sinking Fund


in Budget,Savings

Boring!!! Okay it might be but it’s a really important tool for your personal finance arsenal.  In the business world a sinking fund is the act of setting aside funds over a time period to pay off debts or acquire assets.  That models well to personal finance so we’ll assume you’ve got your basic monthly  zero based budget setup but what do you do about those things that you just can’t predict or you’ll have to pay a lump sum some time later in the year?  Enter the variable expense category or sinking fund.  You can call it the money sucker for all I care, it’s merely a place to put a set amount of money every month for such things as car or home repairs, yearly insurance premiums, automobile registrations and even Christmas.  The reason this differs from a normal budget category is that it will maintain a balance over months presumably growing each month with an occasional withdrawal when you have an expense related to that category.  The key is being able to track this appropriately.  Some people go the route of assigning that category towards an online savings account.  The ING Direct Savings account is often praised because you can create sub accounts with a few clicks of the mouse so you could make a sub account for Christmas, and have $50 of each paycheck automatically deposited into that account and when Christmas comes around you go to your sinking fund and pull out cash rather than hitting the credit cards.  This is when you can see the power of budgeting at work.

Personally rather than have separate accounts I like to let my budgeting software take care of the tracking for me and keep those variable categories building a balance in my interest bearing checking account.  That way I don’t have the added complexity of multiple accounts and the delay of transferring funds back and forth.  I also love the fact that month over month my buffer of cash in my checking account is growing more and more so that if we overspend in a category I’m not worried about overdrafts or having an automated credit line kick in.  I’ve effectively built my own overdraft fund or emergency fund lite if you will.  It’s just important that you account for your overage for the next month.  Today I use You Need a Budget for all of my finances, in the coming weeks look for a comprehensive software review, there are quite a few options on the market today that should be able to accommodate the variable or sinking fund.

You could certainly track your variable categories on paper or a spreadsheet as well it’s just much simpler to use some software built around the concept.  When we started budgeting we used a written budget and then an elaborate spreadsheet I built and then it started to get overwhelming trying to reconcile my account balance with how much I had for each category.  That’s when I made the switch to a full fledged budgeting program.

A Real World Example of the Sinking Fund at Work

I have been diligently putting $50 a month towards an Auto Maintenance category.  Up until recently I haven’t had to use any of those funds, I got a free oil change not too far back and we’ve been humming along.  A few weeks ago with some recent stock awards from my employer I was able to pay off my truck, woohoo!  Not 30 minutes later I received a phone call from my mechanic that my brake system in my truck was failing, required reprogramming, new rotors, their was water in the line, on and on and that it would be $845 to fix.  Classic.  I may have said a few things not worth repeating but in the end I didn’t have much choice, I knew there was some brake problems and it would have to be fixed.  Fortunately we had been building our sinking fund for just such an occasion so it paid for about $550 of the work and I had some remaining money from my stock awards I hadn’t sent on to our debt snowball so we were able to cash flow the maintenance.  We didn’t even have to tap the emergency fund to tackle this unplanned expense.  Had this been a year or two ago a situation like this would have caused no end of stress and would have resulted with that maintenance going on a credit card.

So how do you handle those variable expenses, separate accounts, software, hoping and praying?

Photo courtesy Rusty Boxcars on

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