Sinking funds what are they and what is the difference compared to savings goals? I demonstrate my process to get my savings goals ready for 2020. My use of a sinking funds and savings goal tracker and sinking funds envelopes. #sinkingfunds #sinkingfund #sinkingfundenvelopes #sinkingfundsheet

Sinking Funds – How do they work? How do I use them?

Having sinking funds that I have saved throughout the year has completely changed my life! We have run into emergencies and I have been able to deal with them with much less stress than before. 

However much you can save will make the difference, will start you on the journey to becoming credit card and debt free and ultimately spending less on charges too!

At first the process of saving for me was difficult. There was always something I needed to spend $10 on and I at the end of the month, I had no cash left.

What is a sinking fund?

Tuppenny over at Tuppenny’s fireplace gives a great sinking fund definition :

In it’s simplest form a sinking fund is a (temporary) savings pot.

 One where you put aside money every month and then spend from that pot on certain expenses.

Your sinking funds are expected expenses as you know they are going to happen.

You sink some money into a fund (savings pot) ready for when you need to pay for a bill or something you know is going to come along.

You know the bill is coming so you are just storing your money in that fund until you need it.


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When should you start your sinking funds?

The answer is any time you feel ready – anything you can save, even cents or pennies is better than no savings at all.

Start small and really view everything you save as a positive step in the right direction.

What’s the difference between sinking funds and savings? 

The describes this well:

With your savings account, you are working to build wealth. As you build your savings, it will eventually begin to work for you.

You do not want to dip into it.

However, with a sinking fund, you are saving up for your planned expense, which means that money was always intended to be spent.

A sinking fund is not likely to increase your overall net worth, but it lets you do the things you want to do, like buy a new car, go on vacation or put a down payment on a home.


savings starting points 

Pay yourself first

It’s important to see savings as paying yourself and providing for your future.

Emergency Fund

If you are starting to save now, my suggestion would be to build an emergency fund over the course of the year of $1000 or £1000. 

It sounds a lot, but it will help you sleep the night after the car breaks or a boiler breakdown, or you have an unexpected payment. 

When I had a small amount of cash spare, I put aside £50 a month total to put aside for saving, and it took me just over two years to achieve this. It’s the best thing I have ever done!

I became a calmer person, not stressed all the time about using credit to fix things and trying to figure out solutions for paying it back the next month.

Figure out how much spare cash you have by making a budget. This will show you how much spare cash you have in your budget that you can devote to your savings.

Long Term Savings

Just to give you an idea, it is recommended that you save between 3 to 6 months worth of your monthly income for an initial long term savings pot.

The thinking is that if you lose your job, or you have a period of sickness, you are going to be much more prepared. How am I going to do that, you might ask.

Don’t worry.. I was in the same place..

The answer is over time.

The emergency fund will give you a cushion for starters, then over time, if you build in saving for the long term, it’s surprising how much you can save.

What can I use a sinking fund for?

Here are some of the things you can use a sinking fund for:

  1. Vacation
  2. Tuition
  3. House Remodel
  4. Christmas gifts
  5. Taxes
  6. Insurance
  7. Birthdays
  8. Dental costs
  9. Opticians costs

Benefits of having sinking funds 

Save for many things and be relaxed because you are ready

So what the car needs fixing? You are ready to go with cash you have saved. Or your other half needs a new pair of glasses. That’s ok – he can go get them. Or what about that birthday treat day you’ve promised your mum? No problem – you’ve saved for it.

Have fun without that guilty feeling

Enjoy that family holiday or that spa day. You deserve it, and you’ve saved for it. Maybe it’s a chance to share a new barbecue range with your family and friends.

Feel good about spending instead of that horrific feeling

So you’ve planned ahead for your spending (and agreed it with your partner or spouse if you have one). Decide what you want to save for together. Why not enjoy your planned spend now? 

Direct your money where you want it to go.

Plan for the unexpected

Life by nature, throws us unexpected things from time to time. Things fall apart (new tyres, brakes and leaky rooves) ..stuff breaks (washing machines, driers, fridges)

 Having that little bit set to one side can really help reduce your stress levels.

How do sinking funds work?

To start using sinking funds, calculate how much you have spare after all your monthly expenses.

Next, action your plan.

Each month, save a specific amount, so you have cash in each sinking fund area, that you can use later on.

Let’s look at an example:

Let’s say you have $600 every month that you can put towards savings.

 If you were to use a savings account, you would accrue $7200 in a year.

After a year, you and your spouse decide you need to buy a new car. Your old car is done, so you purchase a new one for $7200.

Fabulous feeling, to purchase this car with money saved?

The problem now is that you have an oven that is refusing to heat up, a boiler that won’t heat your house, oh and a roof tile has decided to slip and caused a leak all down your beautiful bedroom wallpaper.

So what now?

Do you use some of your emergency fund?

Do you eat takeaway whilst wrapped up in a duvet and ignore the wet patch in the bedroom?

Do you tap your credit card and try to forget about the payment until next month?

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Here’s how you could work it using sinking funds.

If you have the same $600 every month to put towards saving, split up the $600 into four sinking fund areas:

  • $100 for vacation
  • $200 for home repairs
  • $100 for medical expenses
  • $200 for a new car or car repairs

At the end of the year, your sinking fund totals would be:

  • $1,200 for vacation

  • $2,400 for home repairs

  • $1,200 for medical expenses

  • $2,400 for a new car or car repairs

When you and your spouse are deciding whether to buy a new vehicle or not, you have got options still. You could use some of the car sinking fund for repairs to keep your old car running, or alternatively, buy a vehicle for $2,400. 

In the meantime, you will be less stressed because you will be able to pay an engineer to fix the oven element, or replace the oven; you will have obtained a roofer to fix the roof tile, and redecorated your bedroom wall; and your boiler will have been fixed and serviced also.

How Many Sinking funds should I have?

That is completely up to you, but I would suggest keeping it simple at first. Over time, you will be able to add new sinking funds because you will have more cash available.

Think about what are the priorities that you need to save for and maybe one or two fun items.

Set Sink Fund Savings Goals – My Process

To track these, and for all of my savings goals I am going to use this savings tracker. If I set myself goals, I feel much more motivated to achieve them. 

On my year planner, I will write down 5 or 6 goals – I’m not going to overstretch myself. This is because I am overpaying my mortgage with as much spare cash as possible. I also mark down which of my savings goals are sink funds, and therefore I will expect that I will need to spend them at some point during the year.

Organise your sinking funds and savings goals with a yearly savings planner sheet #sinkingfunds #savingsgoals #savemoney #budgeting #sinkfunds

yearly savings goals

  • Goal 1 – Christmas (sinking fund)

  • Goal 2 – Mortgage Overpayment  (sinking fund)

  • Goal 3 – Birthdays (sinking fund)

  • Goal 4 – Taxes  (sinking fund)

  • Goal 5 – Long term savings

  • Goal 6 – Household expenses pots (sinking fund)

Overall, based on my income and what I have spare, I have the total amount of £350 for goals 1, 3, 4, 5, and 6.

Goal 2 is saving money for overpayment of my mortgage. The mortgage company say that I have to overpay at least £500 at least, so I will have to write this down as a sinking fund, so I keep track of it properly.

Sink Fund Envelopes

For goal 1 (Christmas sinking fund), 2 (Mortgage overpayment sinking fund) and 3 (Birthday sinking fund) I am going to use sink fund envelopes to save because it motivates me a lot to see actual money building up in front of my eyes. 

My Christmas envelopes provide me with motivation and I can spend the money if I see a bargain before Christmas, as the cash is readily available. On the reverse of the envelope is a spending tracker, that will help remind me throughout the year, of what I have spent, so I keep within budget. 

Goal 3 is a similar idea to goal one. Birthdays happen throughout the year, so I will need a sink envelope with cash in, so I can buy presents as and when needed. 

For goal 2 (mortgage overpayment) I will use a sinking fund envelope only for transferring spare cash to. At the end of each budget month, I will transfer any cash left over in my cash envelopes to this sinking fund envelope. When it is full, I will pay it in to my checking account.

I have changed my Christmas budget completely by starting early. Here's my Christmas 2020 budgetonce I have set my sinking fund and savings goals, I track them on my savings goals tracker sheets #savingstracker #sinkingfunds #sinkingfund #trackyoursavingsAs part of my savings goals plan and sinking funds tracking, I use sinking fund envelopes. Buy this set in my shop! #sinkingfunds #sinkfund #cashenvelopes #cashbudget

Using Saving Pots Within your checking account

For the other goals, I will transfer the money for them into my checking account that has savings spaces.

This also has transformed my saving. Lots of accounts now have this feature.

 Basically, you can have small saving pots, all within your main bank account.

Examples of these include: Starling and  Monzo.

For any larger amounts, I would suggest the savings pot approach, as it has helped me keep track of what sum of money was for what. It didn’t get sucked into the main account anymore.

When should I pay into to my sinking funds or savings goals?

My rule is to pay myself as soon as my paycheck hits my account. I go through all my savings goals and allocate the monthly amount to each one.

For peace of mind and organisation, I note down on each goal’s tracker sheet, what I have done each month.

These individual trackers are really useful, because they can show you your achievements also.

One month last year, I got £200 worth of cash back into my account, on top of my paycheck, so paid this into my long-term savings.

Watch me explain my goal setting for sinking funds and savings here.

With a tracker, I can see every time I have had a savings win and celebrate it! I can divert extra income to where I want it to go and see my progress over time.

With sinking funds, I also record when I have paid out on this goal, so I can see where my money went and review it at the end of the year.

My new budget manual also has this tracker inside, so you can create your budget and set your goals for sinking funds and savings at the same time.

Find out more