Have you ever heard the term ‘sinking funds’ in the Debt Free Community (DFC) and wondered what the hell people are talking about? Read on to find out what they are, how they can be applied to personal finances and how to get your own sinking funds tracking spreadsheet for free.
What is a Sinking Fund?
Sinking Funds are officially defined as:
a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset
How do they apply to personal finance?
With a sinking fund, you save up a small amount each month (or each payday) for a certain amount of time before you spend it. To determine how much you save, take the total amount to be spent and divide it by the number of pays you have left until you need to make the purchase.
For example, let’s say you need to put away $1,000 for Christmas, you get paid monthly and it’s currently September 1, you get paid on September 15. This leaves you with 4 paydays between now and Christmas. Which means you’ll need a category in your budget for Christmas and you’ll need to put away $250 every payday from the September 15 until December 15.
You can apply this principle to any major purchase or bill, especially ones that come up yearly and seem to just sneak up on you, such as household rates or your car registration.
Where to store your sinking fund
There are two options for this: either in an online savings account or in cash envelopes. I prefer to use online savings accounts, but it’s totally up to you. I personally don’t want to have cash lying around in my house just in case of robbery. You can also benefit from interest if you use savings accounts.
What you can use a sinking fund for
Pretty much anything you can think of that doesn’t come around every single month can be turned into a sinking fund. This means that by the time the bill comes around you will already have the money put aside and it’ll be no stress! Imagine that!
A variety of common sinking funds are:
- Car Registration
- House Rates
- Utility Bills
- Car Maintenance
- House Maintenance
- Technology fund
- Christmas/ Gifts
- Passport Fees
- Drivers Licence renewal
Remember, a sinking fund is different from an emergency fund. A sinking fund is set up for a specific bill/purpose. An emergency fund is for random, unexpected emergencies.
How I use Sinking Funds
I currently have the following sinking funds: Rent, Medical, Christmas/Gifts, Car registration, Go Card (public transport), Drivers license, Roadside assistance, Car maintenance, Parking/Tolls, Petrol, Car insurance, and Utilities. These are a mix of monthly bills and the less common bills that come up yearly. I don’t own a home or have children, everyone’s funds will vary depending on your circumstances.
I keep my sinking funds all in one high-interest savings account with ING. I don’t like to split them up so that I get the highest interest rate benefits possible. I then use my spreadsheet (download below) to keep track of each fund in a different column in the sheet. Every time I add money into a fund (usually on my monthly payday) I write the date and the amount in the appropriate column. When I remove money I put a minus sign before it (e.g -$100) which keeps the running balance at the bottom up to date.
Below is an example of my spreadsheet.
Get your own tracking spreadsheet
To help you track of your sinking funds I’ve provided the exact same sheet that I use for tracking my own funds. Please note that this spreadsheet groups funds into categories. You may want to adjust this if you have yours all in their own separate accounts. I keep mine all in one online savings account and just use the spreadsheet to keep track of how much is in which account.
Note: This download is an excel spreadsheet (.xlsx) and you will need to have Microsoft Office installed on your device to open it.
I’d love to hear what sinking funds you have and how they are working for you. Give me a comment below.