Sinking Funds 101



Do you get overwhelmed when life happens and the funds that you need, just aren’t in your bank account? Or, you didn‘t budget for those annual memberships, anniversaries, variable expenses, birthdays, family vacations, etc., and therefore you have to pay for those special moments in lump sums which wipes out your paycheck immediately? Well using sinking funds aka cash envelopes may be the answer to solving your bank accounts most critical problem(s).


What are sinking funds?


Cash envelopes
You can write the total amount you want to save on your cash envelopes.

Sinking funds simply put are various savings accounts or cash envelopes used to pay for the expected or sometimes unexpected expenses we have in life without creating debt for ourselves. According to Savology, “The purpose of a sinking fund is the ability to plan for large purchases while staying on track with your retirement income goals. You’ll be able to keep your debt low while avoiding feeling a pinch on your budget (2020).”


I have several sinking funds for my long-term and short-term goals. Your sinking funds will be different from mine because our lifestyle and expenses are different. In order to start using sinking funds, you must first create a budget for your weekly or monthly expenses. From there, look at your variable expenses and pay for those expenses with cash. Some of us tend to spend money as long as we see it in our bank accounts. Using the cash envelope system for your sinking funds, helps you avoid that from happening. I want to take a moment and list some common variable expenses that you and I use that we do NOT have to swipe our credit/debit cards for and be tempted to spend more than what we budget for.


List of common variable expenses:

  • Groceries

  • Gas or public transportation fees

  • Lunch money

  • Daycare expenses

  • Children allowances

  • Diapers or pull-ups, formula, etc.

  • Medical co-pays

  • Coffee

  • Eating out

  • Clothing and/or work uniforms

  • Beauty (nails, hair, eyebrows)

  • Self-care (spa days, therapy, etc.)


You can use your variable expenses to get started on using the cash envelope system for your sinking funds. I personally put my sinking funds out of sight until I am either stuffing them or pulling the cash I need, from them. Groceries is a common expense that we get off track on frequently. If you say your budget for groceries bi-weekly is $250, put that amount of money into your grocery envelope and once that money is gone, that's it! NO MORE SPENDING until your next pay period.


Now let's get into the list of things or special occasions that require you to save for a lot longer than your variable expenses. These sinking funds can be used for a targeted date or a certain amount of money you want to have for something. Check out a few examples in the list below:


  • Christmas

  • Black Friday

  • Cyber Monday

  • Anniversaries

  • Birthdays

  • Annual memberships (ex., Amazon Prime)

  • Saving Challenges (ex., $1, $5 or 52-weeks)

  • Home repairs

  • Car insurance premiums

  • Vacations

  • Summer activities for the kids (ex., summer camp)


You can put small amounts of money in these sinking funds that will add up over time. My new sinking funds I created this year are for Black Friday and Cyber Monday. Instead of impulse buying, I will intentionally have money saved to buy things on those days, next year and not feel guilty afterwards. So for example, every paycheck I receive, I'm stuffing $5 into my Black Friday sinking fund. Of course you can add more to your cash envelopes as you see fit to do so or once you have reached a savings goal from another sinking fund, roll that cash stuffing amount over to your next sinking fund.


Online Sinking Funds


For those of us who prefer to keep our money in the banks or make transactions online.... you can use online sinking funds typically with your bank by opening up multiple savings accounts. I bank with Chase, Capital One and Goldman Sachs for this very reason. Chase is my primary checking account where I pay all of my bills and I have a mini-emergency fund in a savings account. Capital One is where I keep my "schmoney" or my allowance to purchase whatever I want and I put other short term sinking funds such as Christmas accounts for all of my children in various accounts. Finally, Goldman Sachs is where I keep my larger and long-term sinking funds because it's not as easily accessible to withdraw money from whenever I want. There's no debit card attached to the accounts and to transfer money into my accounts, it takes a week on average and 3-5 days to withdraw money from my accounts. Talk about having discipline!


You know what works best for you so create your sinking funds accordingly. If you're not good with holding onto to cash, may be online sinking funds will work better for you. Most banks will let you open up various savings accounts. I personally love Capital One but feel free to do your own research.


Your sinking funds are NOT your emergency funds. Emergency funds (EF) should be kept in a separate account and used for emergencies only! If you follow Dave Ramsey's 7 Baby Steps, you should at minimum save $1,000 for your emergency fund to get you started. Think about it. What happens when you take money from your EF to pay for a quick vacation that you didn't plan or budget for????? Of course, an emergency either happens on the trip or it happens once you return back home and now you're left with probably swiping your credit card(s) to pay for that emergency. My advice, save for your emergency funds FIRST and or simultaneously with your sinking funds.


I have cash envelopes that I purchased from Amazon here and some that I made myself (see image below). If you're thinking about using sinking funds, don't overthink it, just get started, watch how to videos on YouTube and enjoy stuffing your sinking funds. I promise, you will enjoy watching your cash grow in the envelopes or be used for those expected or unexpected expenses in life.



Cash envelopes
I love creating my own sinking fund envelopes.

If you have any questions about sinking funds or want to share your experience using them, post them in the comments below. I am not a fiduciar, this information I provided, works best for me and my lifestyle. Please speak with a financial advisor regarding specific questions you have that pertain to your budget.

*Feature image courtesy of Perfection Hangover blog*