A sink fund helps prevent debt

What is a sinking fund?

I mention sinking funds in my blogs to my group some times and often get asked what they are.  It is a tool that I use to help me stay out of debt and attain my financial goals.  Simply, I budget a little bit to put away each month to save for the bigger bills.   That way I do not  have to find all the money at once when it is needed.  This is not the same as having an emergency fund as that is for unexpected expenses.  The sinking fund helps me pay for expenditure that is expected such as wear and tear on my car eg new tyres, Christmas, holidays, or annual bills like the MOT or insurance.  They are expenses that I know that I am going to have to find in the near future. It is an organised way of paying for them so that we do not have to put them on the credit card.  I therefore stay out of debt.

How much do I need to put in my sink fund?

I initially worked out how much I needed to put away each month by looking at old bank statements and seeing what I had spent on these kinds of things the years before, and what I could afford from what was left after bills were paid. You might not think that you have any spare money, but every little bit helps and so put away what ever you can.  When I first started I put more in the account than I thought I could afford, and some months I had to borrow a bit back, but lots of months the extra stayed there as I managed without it.  This then helped when I needed a plumber for a burst pipe or if a bill was more than I expected.

Each year the amount I save goes up as prices are rising. I also check when the money will be needed, and I spread out the bills through out the year as best as I can. Examples of how I decide how much to put in are as follows. I spend around £750 on holidays and breaks away a year and so this amount is divided by 12 and I put that in the sinking fund.  My car cost me £425 for MOT and repairs last year and so this year I am dividing £500 up by 12  and putting that into my sink food.  Hopefully it will not be that much this year and so that will mean I will have spare money in the account and can pay in less for the car next year.  I divide all my insurance up by 12 and add some extra to those and save each month.  That way I can buy annual insurance by using my sinking fund as that is cheaper than monthly direct debits.

I now divide my sinking fund into these categories.

Home which this year included buying a new rug for the lounge and some thicker curtains to save energy and keep warmer.  It also included a chimney sweep.

Car as well as the MOT and repairs I try to put a little bit away towards a new car as well as it is getting older. Any spare money left from last month goes in on pay day

Holidays and breaks  I have stuck to the same budget for about 9 years now but borrowed a bit from my savings to have a more expensive holiday this year as I am getting older and inflation is making my emergency savings worth less.  I don’t want to die with money in the bank having deprived myself as my Mum did.

Insurances I have the usual insurances for the car and the house.  Some people might have mortgage, holiday or personal insurance.

Medical eg dental, spectacles, prescriptions (the latter are free for me now).

Presents for birthdays and money for Christmas

Projects on the house eg  decorating, and we needed new glass in a couple of windows this year, and some roof tiles needed mending.  I also bought some bins as water butts.

Every one is different and will need different categories depending on life style and what is important to them, eg some one working may put money aside for an annual train card.  Back in 2010 I started with my essentials which were car, insurance and medical as I was living pay cheque to pay cheque, and then as my budgeting became better and I paid off debt, I increased the categories so that I felt that I could move forward with projects on the house, and have holidays.  A sinking fund helps me to save up for things that I want and enables me to live debt free.  Now that interest rates are higher it is also accruing some interest which helps.

If I do not have enough in the sinking fund for anything other than the basics, I do without, or I sell something, or get a side hustle and put that money in.  Last year I took some paid writing work for a few months to boost my sinking fund.  Without a sinking fund I would not have been able to buy an air fryer when I found one half price. I would not have been able to get new glass in my windows.  Money would probably have been spent on other things, but by setting a goal to mend the windows and finding out how much it would cost and saving it,  I managed to get them done this year,  I refuse to use my credit card now unless I can pay it off at the end of the month.  I have been down that slippery slope and am never going there again.

Payday habit

Putting the allotted amount into my sinking fund each month is the first thing that I do when my pension is paid into my bank account.  I treat it like any other bill that I have to pay.  A sinking fund will not work unless you consistently put the specific amount you need in every month, though it may help you accrue less debt.  I keep my sinking fund in an easy access, high interest account and so it also increases slightly.  I know in my head the amount I have saved for each item as I keep strict accounts. Every penny of my income has a purpose.  There are bank accounts that will let you divide your savings into different saving pots.  Some people save by putting cash in envelopes instead, and other people open multiple accounts.

Odd years I need more than I have actually put away eg. if I have a big car repair, but other years things have cost less and the car has sailed through the MOT needing nothing doing to it.  I leave any extra money put into the sinking fund to help pay for the expensive years so that I do not have to borrow much from my emergency fund.

Have you set up a sinking fund?  How do you organise yours?