Budgeting isn’t just about making sure you have enough to pay the bills each month. It’s also about planning ahead for future expenses. While you should have an emergency fund, the best way to be smart about saving each month is to set up different sinking funds categories.
Sinking funds allow you to put money aside each month for specific things. In this article, you'll learn about the different types of sinking fund categories. These can help you build out your budget and live debt-free.
Why do sinking funds categories matter?
The purpose of a sinking fund is to save cash for specific expenses. That can include one-time or irregular expenses. The cash ideally, should be broken up into categories.
For example, if you have a wedding that's coming up, instead of using your credit card, you can set aside a specific amount to reach your goal. Which would fall under a wedding category in your sinking fund.
Categories matter because they ensure the money gets allocated to what is a priority within your sinking fund.
Some of the benefits of sinking funds are that you don't have to pay for things all at once, and you keep your finances in good shape.
You set aside money from your paycheck each month (or whatever frequency you decide) towards a specific financial expense. Which is to ensure you’re not going over your budget when a big event like a wedding or a birthday comes up.
Rather, you'll save the money slowly for upcoming expenses and save yourself from taking on long-term debt.
Though 80% of Americans have a budget, setting up a sinking fund with specific categories can help you take those budgeting skills to the next level, so you’re prepared for every aspect of your life.
18 Sinking fund categories
There are many sinking funds categories. They aren’t just for parties and can include yearly expenses, car care, wedding expenses (which can be costly), and more. Here are some of the more common sinking funds that you can incorporate into your budget:
Probably one of the biggest expenses besides housing is transportation. Whether you own a car, take public transport, or use Uber on the weekends, it’s important to budget for your transport costs.
If you own a car, you can set up a sinking fund to pay for unexpected car repairs. This can include maintenance costs such as oil and tire changes, car registration, parking permits, and car insurance. You might even set aside money to purchase a new car eventually.
And for those who use public transport, you can set aside money for train or bus passes or ride-sharing apps.
2. Medical expenses
Other sinking funds categories include medical expenses. Going to the doctor can get expensive, especially if it’s an emergency. In fact, over half of Americans have medical debt, even those who have health insurance.
Even with good health care insurance, it’s important to set up either a medical Flexible Spending Account (FSA) or Health Savings Account (HSA) to use as a medical sinking fund, so you don’t end up in debt due to medical expenses.
Christmas is a good example of sinking funds categories that come every year. Unfortunately, many people don’t prepare ahead of time, eating into their budget or savings to pay for the holidays.
By setting up a sinking fund specifically for Christmas, you can incorporate your holiday budget into your overall expenses.
Determine how much you plan to spend for the holidays. Then divide that amount by 12 (or 6 or 9 if you want to save for only part of the year). That’s the amount you’ll need to set aside each month.
Don’t forget to think about things like Christmas gifts and dinners, travel expenses, and decorations when calculating how much you’ll need.
Another good example of sinking funds categories is vacations. Since you might only take them once or twice a year, you can plan and budget ahead for your time away. By planning and saving months ahead of time, you can be even more prepared.
That will allow you to take your vacation without having to worry about money, so you can truly turn off and relax.
The average cost of childcare is just over $7,000 a year. Between babysitting, school expenses, new clothing, dental and eye care, and summer camps, having kids can be expensive.
While some childcare-related expenses might be unexpected, like when your child has a sudden growth spurt, you can prepare ahead of time for many by setting up a sinking fund.
Not every child needs braces, but many do. Braces are very expensive, costing thousands of dollars.
You may spend even more if you have more than one child. So it's worth it to add this expense as a financial goal.
If you have any children or are planning to have kids, start saving early.
It might not be the most exciting of sinking funds categories, but utilities are a necessary expense that sometimes can fluctuate throughout the year.
For example, if you live in an area with harsh winters, your electricity bill is likely to be more expensive in the winter than in the summer.
You can plan ahead for these moments by setting up a sinking fund. Figure out the average you paid last year and split it between 12 months. That way, you’ll already have the money in your account when your bills are more expensive.
While self-care doesn’t have to be expensive, if you like to get specific hair or spa treatments, then it might make sense to set up a self-care sinking fund.
Massages, nail care, laser hair removal, and more are all expenses that can add up. So incorporate treating yourself into your budget by setting up a sinking fund.
9. Special occasions
Special occasions like a major anniversary or wedding might not happen every year, but when they do, they can be expensive.
For example, retirement parties, bar mitzvahs, quinceaneras, or weddings can cost tens of thousands of dollars, depending on your family and societal expectations.
You can start saving for these events as much as three to four years in advance to help spread out the cost of these one-time expenses.
10. Annual renewal expenses
Some expenses might happen every year, such as annual renewals. For example, if you own software or subscriptions that are paid on an annual basis.
Write it down in your calendar when the payments are made so you can prepare well ahead of time for anything that is a recurring expense.
Unless you’re doing a no new clothes challenge, you might want to make a sinking funds category for clothing.
That can include general clothing, seasonal clothing like coats or shoes, or clothing for special occasions like weddings or work events.
While you likely won’t need to buy new clothes every month, setting money aside every month can help you be prepared whenever it's time to replace worn-out clothing.
Birthday gifts and anniversary presents can add up after a while. Not to mention costs for Halloween, New Year's, Valentine’s Day, or any other special holiday or occasion you want to celebrate.
Thankfully this category is usually easy to save for. The amounts for gifts are generally lower than other types of sinking funds categories.
13. Home maintenance
If you own your home, you might find yourself needing to make a few changes and do some maintenance. A sinking fund can help you plan ahead for home maintenance bills, even when you have an unexpected plumbing bill.
It's typically suggested to save between 1-4% of the value of your home each year for maintenance.
You can also make a sinking fund for specific home repairs you have coming up, or even unknown costs that may happen. For example, replacing an old dishwasher.
14. Home furnishings
Sinking funds categories can also include home decor like furniture or new appliances. A new couch or bed can be very expensive. Instead of wondering where the money will come from, plan ahead.
Setting aside a bit each month instead of paying off your credit card bill is a lot less stressful and better for your credit score.
Whether you give to a church or another charity or both, it can be a good idea to have some cash saved for a good cause in a sinking fund account.
Even if you don’t have a charity you are currently donating to, a charity sinking fund can ensure that you have the funds if you come across an organization or cause you’d like to help out with.
Some sinking fund categories can even include education expenses like tuition. Education is expensive, especially for private schools.
If you send your kids to private school or are saving for their college, then a sinking fund like a 529 college savings plan might make sense, rather than a traditional savings account.
17. Pet care
Our canine and feline companions may also need some care at some point in their life, so this is another sinking fund example. Besides monthly expenses of food, you should also plan for yearly vet visits, vaccination shots, and emergency medical expenses.
Having a sinking fund set up for your pets can help you care for them without added financial stress.
18. Emergency fund
If you do not already have an emergency fund, you should definitely set one up. In fact, you should start to fund this category before any of the others.
Emergency funds are types of sinking funds categories that can help you pay for any unexpected expense that you weren't planning for.
In general, it's recommended to have about three to six months of living expenses saved up. But you can save more or less depending on your personal circumstances.
Sinking fund categories can help you prepare for the future!
Having a few sinking funds categories can help you manage your finances and ensure you remain debt free.
You can save your sinking funds in a high-yield savings account, a checking account, or whatever you prefer. The main thing is that you make the calculations in advance for how much things will cost, and then save accordingly.
Depending on your needs and lifestyle, you can set up a sinking fund for just about any major life event, whether that’s pet care, saving for a vacation, setting up a fund for your kid's college tuition, or self-care.
To take this a step further, learn more about handling money with our articles about budgeting practices and money mindset.