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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Craig 2009/09/21 at 9:00 am

I understand that they may be more variable expenses, but why not stock that money in the emergency fund? Seems like it is. When I had trouble I went into my emergency/vacation fund to pay it off. Been trying to put a little bit away each month but don’t have separate accounts set up for individual issues like car, just keep it all together.

paul 2009/09/21 at 12:54 pm

You totally could stock it in an emergency fund but as Ashley pointed out it’s much harder to track your expenditures that way. My credit union pays me a great rate on our checking account so there’s not really a downside to keeping that buffer in one account. It’s a more formal approach saying that I know I will have to do car maintenance and rather than that being an emergency I will plan and budget for the eventuality. The emergency fund would then be relegated to helping with a job loss or a car accident. It’s not a given that I will get in a car wreck, but maintenance is assured.

Ashley 2009/09/21 at 10:16 am

I too like having subcategories for my savings. Craig the best way I can describe the benefit is that its like having an online envelope system. When the money in a certain subcategory is gone you’re more likely to find a way to spend only that amount of money to get what you need. For me it’s a mental barrier to keeping my spending within a certain amount.
.-= Ashley´s last blog ..Credit Report for Richest and Poorest Neighborhoods in America =-.

[email protected] 2009/09/22 at 10:00 am

Sinking Fund? Wow–I haven’t heard that term since my college accounting courses! Adding it to a personal budget is a great extension of the concept.

Usually, they were backward looking, to retire a debt, but it makes sense to set it up in anticipation of know expenses. A retirement account is a sinking fund of sorts.

Personally, to keep it simple, I like having one big sinking fund based on predictable monthly expenses. I know there’s a lot going around about $1000 emergency funds, but I prefer to measure them in months, not dollars. You can never know which expense category the next crisis will hit, so it’s best to be prepared in the most general sense.

Evolution Of Wealth 2009/09/27 at 1:13 pm

I think you bring up a great point of unexpected expenses. It is important to account for those. One thing I think is forgotten is technological change. Things today are changing so fast that it can be expensive to keep up. Whether it be your computer, tv, Blue Ray, video games or anything electronic. It might be something worth accounting for in your budget.
.-= Evolution Of Wealth´s last blog ..A Penny For Your Thoughts”¦ =-.

threadbndr 2009/10/27 at 1:42 pm

I actually use both a sinking fund (in my high yield checking account) AND an escrow account (in a MM account that is linked to my checking).

The difference is that I use the escrow for those intermittent expenses for which I have known date and pretty good idea of the $ amount. Taxes, auto registration, insurance that has quarterly or semi annual payments – things like that. I’m planning to add funds to cover the insurance deductibles to this account, too. These funds are committed and therefore untouchable.

The sinking funds are for the ‘it’s coming, but who knows when or where’ things – auto repairs, vet bills (a part of these probably should be in the escrow for Mol’s yearly shots, but I’m not complicating this THAT much), gifts, major clothing purchases. If I dip into this fund, I do try to replenish, but like the OP – it’s also my overdraft/overbudget cushion. I track on a budget spreadsheet that I wrote for myself.

I like EoW’s idea to add a line item for ‘electronics replacement’. Or I could just add more funds to the ‘appliance replacement’ and retitle it ‘household/office replacements’. That’s a hole in my budget that I hadn’t thought about. thanks!

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