Think about the last time you had an unexpected expense — the bathroom flooded, your cat got sick, or you got a flat tire. These kinds of expenses can create stress — even if you have an emergency fund.
We’ve talked about emergency funds before, including how much you should save and when to use those funds. Emergency funds are, of course, for emergencies! Any bill or expense you didn’t see coming can count as an emergency.
Too often, people rely on emergency funds for expenses they do know are coming, but don’t occur very often. For example, birthday or holiday gifts or car maintenance.
That is where a sinking fund comes in.
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What Is a Sinking Fund?
A sinking fund is a fund established to save for expected expenses over time. When most people create a budget, they account for monthly expenses like the electric bill, rent or mortgage, and groceries.
But there are other expenses that arise just a few times a year or even every few years, such as school clothes and new computers. Creating a sinking fund allows you to pay for those expenses without tapping into your emergency fund — or worse, pulling money out of investments.
What Categories of Sinking Funds Should You Have?
You should have sinking funds for any expense you expect to arise, within reason. For example, you can’t really predict a global pandemic, right? But you do know that you’ll need to buy Christmas presents for your nieces and nephews.
The number and category of sinking funds you create will vary based on your life, income, and values. Here’s a few examples of sinking fund categories to consider:
- Car repair/replacement: This can act as a place to store more for repairs and maintenance. But it can also be used to build up a fund to replace your current car.
- House repairs: The average roof needs to be replaced every 20 to 25 years and can cost upwards of £10,000. Would you be able to cover that? A sinking fund for house repairs should cover leaks, a new roof, appliances, and general maintenance.
- Gifts: Set aside a few pounds each payday to buy gifts for Christmas, birthdays, and weddings. That way you won’t be stretched thin when the times comes to buy the presents.
- Electronics: You can create separate funds for each piece of equipment. But you may find it easier to have a single fund. Just make sure you are putting enough into it.
- Pet care: Vet bills can add up quickly, especially once your beloved pet gets older. Setting aside a bit of money every month means you are prepared if your pet needs emergency surgery or becomes ill.
These are just a few examples of sinking funds. Take the time to look at all your expenses — you might realize that what you considered an emergency was actually an expected expense. If so, create a sinking fund for it.
Adding to Your Sinking Funds
The amount you put in each sinking fund will vary based on your income, location, and the bills you need to prepare for. Plan to save one percent of the value of your home per year for home repairs, then consider how much you spend per year on other expenses and save accordingly.
Consider placing a cap on sinking funds. For example, once your pet fund reaches £2,000, that money might be better served by investing in bonds or gold, where it can potentially earn more than a standard savings account and provide you with greater resources over the long-term.
Conclusion
Emergency funds should be for true emergencies, not expected expenses that arise periodically. Sinking funds help protect your emergency fund — and reduce stress.
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