Last Updated August 20, 2023 by Davina Kelly
Having sinking fund categories in your budget is a smart choice.
It is a fail-proof way to ensure you are prepared to cover all your planned expenses throughout the year.
Including sinking fund categories in my budget was a game changer! My budget was helping me to manage my finances well, but including these categories took it to the next level.
It allowed me to cover all of my expenses and reach my financial goals with ease as I had a plan for everything.
In this post, I will share some of the categories I recommend including in your budget.
This post is all about sinking fund categories.
What Is a Sinking Fund?
A sinking fund is essentially a fund set aside for specific upcoming expenses. Having these funds in your budget can be a lifesaver. It can stop you from having to use credit cards or taking out loans and incurring debt for costs you didn’t plan for.
In accounting we use a term called sunk cost, this refers to money that has already been spent and can’t be recovered. For example, if you are purchasing a property and have to pay legal fees this would be sunk costs as whether the sale goes through or not the legal services were provided and therefore can’t be recovered.
In budgeting, we are planning for these costs on a micro level. These sinking fund categories will replace your miscellaneous costs, as the idea is that you have a fund for every expense.
You know that you have to pay for car maintenance each year, so why not create a fund and save up for it? Planning ahead and making smart choices with your money is key in personal finance!
Benefits Of Sinking Fund Categories:
The benefit of having sinking fund categories is that you are prepared. You have a plan in place to cover all of your expenses. Think of the sinking fund categories as well planned mini savings accounts.
For example, if you have a family birthday trip coming up, instead of using a credit card you can create a fund for the trip in advance and contribute to it each month. These costs can go to your family sinking fund category.
Having categories set up for your sinking funds is important as this way you can ensure all the important expenses in your life are planned for.
This can give you peace of mind as you know you have planned ahead and factored everything in. It will also help you to manage your money better as you won’t have to pay for things all at once.
How To Set Up Your Sinking Fund Categories:
The best way to set up your sinking fund categories is to think about all of the expenses you have throughout the year. You need to include all of the important things for you and your financial needs.
Think about things like annual expenses, birthdays, Christmas, and special occasions such as weddings, travel, etc. You can look through your bank statements to ensure you don’t miss anything.
Next, you need to sit down with a piece of paper or your notes on your mobile if that is easier, and make a list of all of the categories you want to include in your budget. You also need to write down the amounts, and the date of the events/when the expense is due.
If it is a fixed expense, note the amount and how many months you have until the event. Or if it is a fund where you can decide the amount it is best to overestimate.
For example, if you are planning a holiday next August and the maximum you want to spend is $2,000, you can then divide $2,000/12 months. This will mean you need to put $166.66 each month into your holiday fund. I would round it up to $167 for completeness.
Once you have gone through this exercise for each sinking fund you need to decide where you will keep the funds. I would recommend using your bank account as most transactions are done with your card online or in person.
I know some people prefer cash stuffing envelopes and that is fine if that is your preference. However, using your savings account will save you from having to go to the bank to deposit the cash to make the purchase. It will also make the transactions easier to track.
If you decide to use your bank I would recommend using a separate savings account for this. Some banks like Starling and Monzo allow you to create different savings pots. So you can create one for each sinking fund category.
Best Sinking Fund Categories
Sinking Fund Category For You:
1. Self-Care:
Self-care is something we should all create a sinking fund for. It is important to take time for yourself to rest, relax and refuel. Making time for self-care can reduce stress and anxiety, improve your mood and boost your self-esteem.
Maybe once a month you can take time for yourself to do the things you enjoy. This could be having a spa day, getting a manicure, or going to your favourite yoga class.
It doesn’t have to be expensive, you can plan and look for the best deals. You can put as much or as little as you want into this fund.
2. Clothing:
You don’t need to buy clothes every month, but throughout the year you may want to invest in some new pieces.
Clothes can get worn out or your style may change. By creating a fund for new clothing you can shop in a smart way. You can save some money each month and when the sales are on you will be prepared to take advantage guilt-free as you will have planned for it.
This way you can purchase quality pieces that will last you a lot longer.
3. Travel:
Most people travel at least once a year. Whether it is a family holiday, baecation, or a solo trip. Planning for this in advance can be a lifesaver. If you plan for it you will be fully prepared to cover all associated expenses even down to your taxi to the airport.
I would recommend deciding where you want to travel and doing some research to see how much it will cost. This way you will know how much to contribute to your fund.
Traveling off-season is a good way to save money as there are usually a lot of deals around this time.
4. Month Ahead Expenses:
Creating a fund to allow you to get a month ahead on all of your expenses is smart.
Having this fund can give you peace of mind as you know you have a backup plan. It can also be a buffer between your emergency fund.
5. Education/Development:
Investing in your education/development is super important. You are your most important asset so why not invest in your development?
You can do this by taking online courses, these courses can be for things you are generally interested in learning or they can be related to your career. Taking these courses can boost your career and make you invaluable.
Reading books is a cost-effective way to help with your development. There are so many genres of books, my favourite is Self-improvement. These types of books have been a powerful tool for my growth, so I would recommend them. Some of my favourites are The Alchemist, The Four Agreements, and Atomic Habits.
Other ways to invest in your development are attending seminars or hiring a coach.
You can contribute something like $10-$20 a month for this fund it doesn’t need to be super expensive. If there are courses you have in mind, research the price and then you can put aside equal amounts each month.
Sinking Fund Categories For The Home:
6. Annual Subscriptions:
Most of us have subscriptions like Netflix, Disney +, Amazon Prime, memberships, etc and these can add up.
You can create a fund specifically for these monthly payments, or if it is an option you can pay them in advance for the year.
When you pay them in full for the year your monthly rate is usually cheaper so you can save a little. I prefer having minimal direct debits coming out of my account each month, so where I have the option I pay for subscriptions in full.
I know that not all subscriptions give you the option to pay in advance, but I know Amazon Prime and membership subscriptions usually do. So if you can, take advantage of it.
7. Home Insurance.
Insurance is an expense you have every year so you should create a fund for it.
I would recommend doing some research on the best deals a few months before it is due for renewal. This way you can ensure you are getting the best deal.
Creating a sinking fund for this will give you the option to pay it in full and benefit from the savings.
8. Home Improvements:
Our home is our sanctuary so we should make it as comfortable as possible.
Home improvements can be as big as renovating your bathroom or as little as buying a new coffee table. How big or small this is will depend on your situation.
Either way, you should create a sinking fund for this. Think about the improvements you want to make and how much it will cost. Then create a fund and contribute to it each month.
9. Mortgage Overpayment:
If you have a mortgage making overpayments can help you to pay it off quicker. Your mortgage is usually your biggest debt, so if you can take small steps to reduce the amount over time why wouldn’t you?
You will need to check your options with your provider, but most allow you to overpay by 10%.
Once you know how much you can overpay, calculate the monthly amount and add it to your sinking fund.
10. Emergency Fund:
Emergency sinking funds can go into any category to be honest, but either way, you need to have one.
This fund is for any unexpected expenses that may come up. Things like job loss, car or home repairs, and medical emergencies. Not having a fund in place for these costs can set you up for failure.
I would recommend having at least 3 months of essential expenses in this fund plus a buffer. For example, if your monthly expenses are $1,200 I would add a $400 buffer for the unexpected expenses. This would make your emergency fund $4,000 in total, $1,200 x 3 plus $400. Each month you would put aside $334 (rounded up).
Doing this ensures that absolutely all bases are covered.
Sinking Fund Categories For The Family:
11. Birthdays:
We celebrate birthdays each year so we should be prepared and create a sinking fund for them.
Having a sinking fund for birthdays will allow you to be prepared, this way you can buy your gifts in advance. Because you are prepared you can buy your gifts when they are on sale which is a smart way to shop.
Look through your calendar and make a note of all the birthdays you have throughout the year, then decide how much you want to contribute to this fund.
You can put aside as much or as little as you like. Gifts for all birthdays do not need to be expensive.
12. Gifts:
If you have events throughout the year such as weddings and anniversaries you can create a sinking fund to purchase a gift.
Again, it doesn’t need to be expensive. Sometimes a nice card and a bottle of wine are enough. After all, it is the thought that counts.
13. Date Night:
Date night is super important in a relationship. It is time alone to enjoy each other’s company while doing the things you enjoy.
You could have a couples massage, go out to dinner, or go dancing. How often you do this is up to you. You can decide to have date night every month, every other month, or quarterly.
Think about the activities you enjoy doing together, and how much they cost and put aside equal amounts each month.
14. Fun:
Making time for fun is important to enjoy life. Whether you are single or have a family you can create time for fun.
You can go to the cinema, bowling, or go to the theatre. The frequency is your choice, think about the things you enjoy doing with your family and friends and how much it costs. You can contribute small amounts to this fund each month.
15. Holidays:
Holidays like Christmas and Easter happen every year, it is a lovely time to spend time with your family and we want to be prepared.
These holidays usually involve food, a lot of good food lol, and sometimes gifts. For example, at Christmas, you usually cook a big meal and give presents. For Easter, you usually cook a big meal but you don’t need to have presents although you may buy Easter eggs for the kids.
Creating a sinking fund for these holidays will allow you to plan and be prepared.
Sinking Fund Category For Medical:
16. Dentist:
Staying on top of your oral hygiene is important. It is recommended to have a dental check-up at least twice a year, or every 6 months. Maybe more if you have ongoing issues.
Creating a sinking fund for this will ensure that you can pay those bills with ease. I would recommend saving a little buffer for this.
For example, if your teeth are in good condition and you are just having regular check-ups you may want to add a $50 buffer in case the dentist detects a problem you were not aware of.
This way you are still prepared and won’t have to dip into another fund or use your credit card to pay the bill.
17. Vision:
Staying on top of your eye care is super important especially if you wear glasses or contact lenses already.
I would take the same approach as above and save a little buffer.
18. Medical:
Even if we feel healthy it is important to have a check-up at least once a year.
You can get your blood work checked, weight, and blood pressure. This is the minimum you should be doing each year.
I would also take the same approach as above and add a buffer for this fund.
Sinking Fund Categories For Your Car:
19. Car Insurance:
Car Insurance comes around every year so we should be prepared and create a fund for it.
As with home insurance, I would recommend doing some research on price comparison sites a few months before it is due for renewal. This will show you the best deals available.
Sometimes your current provider will offer you a good deal but you want to be prepared and ensure that you know all of your options. Also, you want to check you don’t have your insurance on the auto-renew option.
This will allow you to have more control over the process and not be in a position where the provider has taken money out of your account that you don’t want to pay. This could also leave your account overdrawn and incur fees and you don’t want that.
I would also recommend paying your insurance in full and benefitting from the savings. Paying it in full will also reduce the amount of direct debits you pay each month.
20. Car Maintenance:
Car maintenance such as MOT inspection, Road Tax, and having your car serviced comes up each year. This is an important sinking fund as additional things could come up making this maintenance costly.
For example, when you take your car for an MOT check you hope for the best but things can come up that need to be fixed to pass the inspection. Things such as brakes or tyre repairs or replacement.
For this fund, I would recommend adding a buffer. You want to be as prepared as possible, this way if something additional comes up your fund can cover it.
21. Car Repairs:
Even though you maintain your car, repairs may still come up unexpectedly throughout the year.
For example, you could need to replace your brakes or get a flat tyre. Having a fund in place for these types of repairs will give you peace of mind. It can also help you avoid having to use your credit card which is what we usually do if we are not prepared for these situations.
If you get to the end of the year and you haven’t had to use this fund, that is great. You could either roll it over to the next year or use the funds for something else.
Sinking Fund Category Long-Term Goals:
22. Long-Term Goal:
Having a long-term goal is great for your personal finances. This gives you something big to work towards and will encourage you to work hard towards reaching it.
You could set a goal of saving for a deposit to buy a property. As this is a bigger goal you may want to spread it out over 2 years instead of one. But if you can afford to reach it within a year fantastic, you should do that.
For example, if your deposit is $20k, you could divide $20,000/24 months, making your monthly contribution $834 (rounded up).
This same scenario can work for any other long-term goal such as saving for your dream car. You can calculate the costs and apply the same principles.
Sinking Fund Category For Kids:
23. Back To School:
When it comes to kids costs can add up fast! They grow so quickly and they require new things every year such as clothes, shoes, toys, etc.
Having a back-to-school sinking fund category can be super helpful in allowing you to manage these costs.
Each year kids need new school uniforms, shoes, and school supplies. Then you need to also pay for pictures, trips, and activities.
You can plan and create a sinking fund for these costs so that you are prepared. There are usually back-to-school sales throughout the year and having a fund in place can allow you to take advantage of them.
Frequently Asked Questions:
What Are Good Sinking Fund Categories?
The best sinking fund categories to have are the ones that work best for you and your financial needs.
You don’t need to include categories if they do not pertain to you and your lifestyle. For example, if you don’t travel you don’t need to include a sinking fund category for travel.
I would recommend thinking about the expenses you have throughout the year, including the irregular annual expenses, and creating sinking fund categories based on those expenses.
Some sinking funds that most people will include in their budget are below.
- Annual subscriptions
- Insurance (Home and or car)
- Medical ( Doctors, dentist, and vision)
- Clothing
- Birthdays
Conclusion:
Including sinking fund categories in your budget is a great way to ensure that you are super prepared for your planned expenses throughout the year.
I have given you 23 ideas of sinking fund categories that you can include in your budget, but you should include the ones that work best for you.
Personal finance is personal, so you need to ensure that the sinking funds you include work best for you and your financial needs.
If you didn’t already have sinking fund categories in your budget, I hope this post has encouraged you to consider including them.
Have you found these sinking fund category ideas helpful? Which categories will you include in your budget?
This post is all about sinking fund categories.
Davina Kelly
Hey! I'm Davina, the owner of Davinas Finance Corner. I'm passionate about finding ways to budget, save, earn more money and improve your life. After breaking free from payday loan debt and living paycheck to paycheck I want to share my experience to help other women improve their finances.