10 Sinking Fund Categories to Include in A Budget

Last updated on September 21st, 2024 at 10:28 am

 

Budgeting best practices like putting up sinking fund categories helps us determine where our money should go instead of asking where it went.

Sinking fund categories and examples are not meant to stuff a budget but to enable you to work out future costs with a saving plan. You can put money aside for a future vacation or wedding and that’s a sinking fund example in simple terms.

With such a fund you’re certain about your future plans when it comes to spending money. And if you’re not certain about sinking fund categories let’s all break it down here to make things clear.

 What Is a Sinking Fund?

This is money that is put aside to cater for one-off payments or recurring expenses as they occur occasionally. Planning for future expenses in advance before they present themselves with consequences it’s a strategic financial move.

It’s a rare case to spend what you don’t have hence plan in advance what to spend by budgeting sinking funds.

Let’s say you want to buy a new $4000 laptop in 4 months, it means you have set aside a sinking fund for the laptop. And you might decide to save say $1000 per month which you will use to buy a laptop at the end of that period.

In other words, it is cash held in a reserve to clear debts or settle future specific expenses, the accounting definition of a sinking fund.

Many people use different definitions but it’s meaning still remains the same since they all relate to setting money aside to work on future expenses.

Sinking Fund in A Layperson’s Understanding

What are sinking funds in a budget, right? When you save money for a specific purpose it is spent for that purpose at a certain time period hence the fund sinks.

This means if the time comes to spend the money it’s allocated to that very item it was planned to cover. You can create a sinking fund for different expenses that you’re likely to incur in the near future.

It’s up to you to decide how much you can allocate to the fund depending on your goals and income. And as you keep saving the account grows month by month according to how much you deposit.

But it again sinks when you make withdrawals to cover an expense for which it’s meant to settle at that time.

Therefore, a sinking fund might go up and down depending on its purpose and it’s supposed to cater for expenses that happen at a later time.

The Benefits of Sinking Funds in A Budget?

Some people are not of a type with a sinking funds list putting money aside to cater for future costs but it’s very important. Imagine saving for specific costs to be covered at a later time, it’s challenging though achievable when you’re committed.

If you put up a list of sinking funds, there must always be something to put aside from your paycheck to cater to them. Let’s now look at the different benefits of sinking funds in our budget.

• Works On Impulsive Spending

This happens when you spend beyond your budget on things that you hadn’t planned. Even though some things might be important to spend on but not immediately there and then.

You have to make a plan of how you’re going to do it using a defined strategy, and this means setting money aside in advance to be spent on a certain item at a later period. Sinking funds help in controlling and managing impulsive spending behavior in people.

• Financial Confidence

There are reduced financial struggles when it comes to spending on items that you had already planned for in advance. And this is what it would be like in case everyone put up a sinking fund to cater for future expenses with surety.

Honestly, putting up this fund gives one financial assurance in achieving intended targets.

• Reduces Debts

When you have sinking funds to cater for future expenses it helps you keep away from debts. And it’s because you saved what to spend in advance hence avoiding borrowing and interest payment charges.

Interest on borrowed money is money you would save to cater for a sinking fund in case you had created it.

• Promotes A Saving Habit

With a sinking fund, you put money aside for a specific future purpose on a continued basis. You keep doing this until a certain period it’s meant to last or on a recurring basis with discipline.

Most people get emotionally disciplined in life when it comes to saving money. When one creates a sinking funds budget, he or she develops a saving character due to financial discipline.

Sinking Fund Categories to Include in A Financial Budget

I guess now we have a clear picture of a sinking fund and how it applies to our day-to-day lives. Despite what you think about it but in my thinking, it makes sense from a financial perspective.

Here are the proven sinking fund categories you should include in a budget.

1. Sinking Fund for Medical

This is what most of us don’t want to hear about but it’s among the most important sinking fund ideas. And sometimes it tends to be very expensive with emergencies when not planned for in advance.

That’s why you have to put up a sinking fund that caters to medical expenses that may arise in the future say Drug prescriptions, medical equipment, Over counter medicines, Dental visits, Telehealth visits, Eye care with glasses or lenses, and others.

2. Sinking Fund for Home and Household Costs

Everyone likes his or her home and honestly, it’s one of the most comforting places in life if am to say. There’re lots of things to be worked on in a home and of which you won’t have time to handle in case you have a busy schedule.

Such things might include fumigation and gardening supplies, you can set money aside in advance to cater for these costs in a home. This means you won’t have to hustle around for money needed since it’s readily available in a fund.

Additionally, there are many expenses attached to a sinking fund for a home say Property taxes, Landscaping, and lawn care, home repairs, home insurance, Gardening supplies, Gutter cleaning, Pool maintenance, Annual memberships-amazon Prime, Disney+, and others

3. Sinking Fund for Pet Care

Some people can’t live without pets around the home however much they’re costly to maintain.

Pets need to be taken care of to keep them in good health and which at times would require veterinary attention at a cost. Therefore, having money put aside to cater to pets’ necessities at any time is very important.

There’re different expenses under this category that are involved in pet care say Treats and food, Emergency vet care, Bedding, Flea and tick medication, Pet toys, and Prescription medication.

4. Sinking Fund for Kids

This sinking fund example can be allocated to kids, am pretty sure you wouldn’t want to disappoint your kids if you can provide them with what they want.

Though sometimes it may be hard to provide to the fullest most of the time you have to. And if you don’t have the potential to cater to your kids’ needs then you’ll have to turn down their requests most of the time.

But why not put up a kids’ sinking fund to cater to children’s needs for their well-being? And expenses under a sinking fund for kids would include music lessons, hobby stuff, school clothes and supplies, birthday party and presents, and more.

5. Sinking Fund for Family

You need to have a life with your family sometimes despite the challenges that come along. People in your family need to have fun and you as well but at a cost.

Then it requires you to have some savings in advance at times to cater for happy times. There’re times you would have to put money aside for say going to the museum, birthday party, or house party in order to enjoy.

Any money saved in advance spent in such times it’s meant to do that hence no regrets after using it up. And yes, fun times must be planned for in advance but this should be done when most other necessities of life are fully covered.

There’re lots of sinking fund expenses for families under this category that may be put into consideration say membership subscriptions – gym, sports fees, entertainment – music and gaming systems, donations, and camping fees.

6. Sinking Fund for Vacations

It doesn’t matter whether you may travel or not but having a sinking fund that’s meant for a vacation makes planning easier.

You won’t have to look around for money to cater for that vacation or holiday since there’s a fund readily available. However, it’s hard for some people to plan vacations in advance especially when they have credit card debts.

This fund caters to different expenses that must be put into consideration say dinner costs, travel insurance, Airbnb, resort charges, cruise tickets, ride share costs car rentals, and others.

7. Sinking Fund for Christmas

It’s good to be specific on this one because it’s really a big day across nations in the world, it’s among the most provided for sinking fund examples. And on this very day, people tend to spend a lot of money that’s why having a separate sinking for it is a wise idea.

Sincerely it’s hard to tell what to spend on that day, and what not to spend money on if you didn’t plan in advance. A sinking fund for Christmas must be included in your budget in order to make informed decisions in times when the Christmas season needs come up.

Some of the expenses under this category that you need to put in mind are; meals, décor, cards and postage, entertainment – theatre and festival, travel expenses, and others.

8. Sinking Fund for Personal Care

Always we have to keep healthy by doing things that make our lives better every other day. No matter how engaged you’re you need to look after yourself to stay in shape Healthwise.

So, there’s quite a good number of expenses under the personal care category to consider. Coming up with a personal care sinking fund should be among the top priorities in life.

Expenses under the personal care category include weight management engagements, home workout equipment, massage, salon, therapy, pedicure or manicure, and many more.

9. Sinking For Auto Expenses

Vehicles need maintenance in order to stay in good condition and it should be done every after sometime at a cost.

It doesn’t matter which kind of expense but as long as it’s meant to keep the car in good condition. And therefore, such costs should be put in a budget to avoid unplanned expenses that may suddenly strain your paycheck.

A sinking fund for auto expenses is something you should think about if you’re to keep in check with auto costs at any time.

The auto sinking fund category has a number of expenses that should be looked at say motor vehicle maintenance, car loan, car wash, car replacement, and so on.

10. Sinking Fund for Annual Renewals

Most people forget about one-time annual costs and they end up in debt having spent their paycheck already. The best thing to do is to put money on the side to save for those expenses such that they don’t suddenly get you off guard.

Including annual renewals in a budget keeps you updated and prepared for any annual bills that come up. You need to save money in that at the time of making payments it’s already matured to clear charges.

Under the annual renewal category, there’re also different expenses you might incur say subscriptions, insurance, and more. You can think about quite a number of sinking fund categories to consider depending on how much you can save in relation to your paycheck balance.

But there’re some that you may have to forego because handling many at a go could possibly put you in a poor financial position.

A sinking fund is meant to streamline your spending such that you can do away with financial struggles in terms of expenses.

What Is the Difference Between a Sinking Fund and An Emergency Fund?

Some people mayn’t differentiate a sinking fund and an emergency fund since they both involve an element of saving for future use.

An emergency fund caters to unplanned future expenses and events that may happen unexpectedly. And when such events come up you need to cover expenses attached to them using an emergency fund.

That’s why a sinking fund shouldn’t be confused with an emergency because they serve different purposes. But where an emergency fund can’t serve its purpose to capacity, sinking funds can be diverted to cover up costs.

Therefore, an emergency fund is meant to settle unexpected expenses whereas a sinking fund covers planned expenses.

What Is the Difference Between a Sinking Fund and A Savings Account?

Money saved for a long period of time to cater to future needs is kept in a savings account. The difference between a savings account and a sinking fund depends on what you want to get out of those savings.

In this case, a savings account should be separate from a sinking fund since both accounts are meant for different purposes.

Saving accounts are designed for long-term future goals which it’s not the case with a sinking fund. An account that caters to mortgage loans should be separate from that which caters to a family sinking fund.

Therefore, these are two different accounts that serve different purposes in time.

Examples of Sinking Funds

Short-Term Sinking Fund

This involves money saved for one-off expenses or continuous expenditures. Home and household sinking fund expenditures are revolving whereas holiday sinking fund expenditures are one-off.

You have to put money aside to cater for different expenses as they happen in a home but with holidays when money is saved it’s spent at once. And with a revolving sinking fund where money flows in and out, you have to maintain the account to keep safe.

Yes, you have to maintain it by saving more money since you make withdrawals every after short period of time when the need arises.

Therefore, short-term sinking funds consist of gym, internet, water bills, and more.

Long-Term Sinking Fund

This type of fund is strictly a revolving type in that money goes in and out to cater to expenses, Such a fund can’t be left empty and at the same time, it’s never full due to continuous inflows and outflows. And this fund includes a new car fund, vacation, student loan payment fund, and others.

How To Calculate Sinking Funds?

There’s no hard formula and strings of numbers in calculating sinking funds, and if you don’t like seeing many figures of numbers surely this is for you. But working out sinking funds works best when putting money aside for a specific time period.

Therefore;

The total amount of money needed / saving period in months = the amount to be saved per month.

Let’s say am saving for a new car worth $35000 for a period of 10 months

$35000 / 10 = $3500

This means that I have to save $3500 per month for a period of 10 months in order to meet the target amount.

How To Create a Sinking Category That Is a Success!

Though there’re different kinds of sinking fund categories also, we must then understand how to successfully create them.

Here are the steps on how to create a sinking fund category that will work.

Determine A Sinking Fund Category

You need to make a selection of which categories to put in a budget that will work your way. And these might involve both short-term and term sinking funds to cater for continuous or one-off expenses in a specific time period.

The number of sinking fund categories held in your budget depends on your saving potential. Therefore, it requires you to keep monitoring each fund category in order to effectively stay in control.

Determine Your Potential to Save

After you have made a selection then you’re required to know whether you can surely make savings for those categories. And this comes down to the fact that where there’s a need to reduce costs for the better then take action.

However, when you want to cut costs emphasis should be put on items that are not basic in life say entertainment and outings.

Sometimes we find that though costs are cut we need to have more income in order to successfully meet financial goals. This means, if your day job isn’t paying enough then go for a side hustle to create another income source.

Determine a Safe Custody for Sinking Funds

There’re different ways to use to keep sinking funds safe depending on time value. Savings could either be held in a savings account or in cash envelopes according to the time value of use.

Though some people opt to keep their sinking fund savings in a checking account this isn’t the best practice. It’s very hard to effectively control the money that is meant for different purposes in a single account.

Automate Savings

Some people find it hard to make saving on their own that’s why automation is in most cases an option. With this practice, it’s possible to constantly save without putting a finger on cash having set direct deposits to each account.

Talk to your employer to set up direct deposits for sinking fund accounts or the bank to automate transfers through your checking account. If you want convenience really automation should be the best option in order to avoid stressing out with portioning money.

FAQs

Can I start a sinking fund at any time I want?

Start up a sinking fund if you think it’s convenient but it’s worth getting started according to my experience. If you don’t have a sinking fund, think about creating it because it will give you a boost in meeting your financial goals with ease.

And there’s no right time to start, any time is the right time things can only work out best when you take action.

What should I do when the sinking fund can’t cover an expense it was intended to settle?

In such a scenario it’s disappointing that the monies in other categories are specifically saved to cover expenses attached to them.

But borrowing money from one category to cover other expenses is the best option you don’t have to stress. And it’s hard to avoid such changes because it’s tricky to predict costs on things like bills due to inflation.

If the money in a sinking fund is used up, what should I do?

It depends on the nature of the sinking fund account that you created in the first place. There’re funds meant for a one-off expense and those for ongoing expenses.

A sinking fund that was created to cover a one-time expense can be closed or using it for another category. But when it comes to ongoing expenses, you’ll have to keep funding the account until the savings target is met.

Conclusion On Sinking Fund Categories to Integrate into A Budget to Successfully Meet Financial Goals Fast

When you create a sinking fund, it becomes easier to meet financial goals in the shortest time possible more so when you automate savings. And if you want convenience automation is the best way to do it out of your presence.

Don’t hesitate to put up a sinking fund in case you don’t have one it makes life easier. But like said there’s no right time to start, any time is the right time to take action things can only shape up when you take action.