What Categories or Events Should I Have Sinking Funds for?

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Your sinking funds can help cover car repairs. Tom Merton/OJO Images/Getty Images

A sinking fund is a way to save up for expected expenses. Basically you are setting aside the money now, because you know that you will need it later. If you are planning carefully and you are aware of your usual expenses you should be able to avoid most financial emergencies (saving your emergency fund for the possibility of job loss) and save in advance for what many people consider emergencies.

You should prepare for these unexpected events, beyond just having an emergency fund in place.

Use Sinking Fund for Repairs and Remodeling Your Home

You can have a sinking fund for car repairs and another for home repairs or remodels. Most people will set aside money each month to cover home repairs or car repairs and not even realize that this is a sinking fund. The truth is that you will need eventually pay for a car repair or for the plumber to come and fix something at your home. Putting aside a little bit each month now will make a stressful event easier to manage.

if you know you have a major repair coming up, you can determine how much you need to set aside to cover it in time. Or you can determine how soon you can complete a remodel depending on how quickly you can save up the money to complete it. Setting specific amounts for each month can help you focus on all of your financial goals and move forward.

Save for Vacations with Sinking Funds

You can also have a sinking fund for vacations. It is best to always pay cash your vacations. If you have a dream vacation you want to go on, or you just want a chance to go to the beach each year, you should set aside money to cover your vacations. Nothing ruins a vacation faster than knowing you really cannot afford to be there.

It is important that your vacation does not ruin your budget, and saving up in advance is the best way to do that. 

You may want to plan one large vacation every year or two and save up for it. The key is to save money before you go on vacation. This will give you the freedom to go where you want to and to have a way to afford it. If you are on a tight budget it may take you a few years to save up for a vacation. 

Cover Medical Expenses with Sinking Funds

You can also have a sinking fund for medical expenses. If you have a high deductible health insurance plan, you may already have a sinking fund for this with your health savings account. You can work to save up enough to cover your annual deductible and you should be able to handle the rest of your medical expenses without too much trouble. 

You should also take into account any money that your employer will contribute to help cover your high deductible. This may lower the amount that you need to contribute to cover medical expenses. Additionally, you should consider how much you will need to increase this sinking fund as you get married and have children. The amount will need to go up as your risks increase. 

Plan for Major Purchases with a Sinking Fund

You can also plan one for any major purchase, so that you can pay for it with cash.

 You may have a sinking fund for the next car you are going to purchase. Saving up for your big purchase or a down payment on your home will help you to avoid going into debt and make it easier to purchase something you can truly afford. This is a big step if you are working on becoming debt free. 

Remember Sinking Funds Help You Reach Financial Goals

Setting your sinking funds now will make it easier to reach your other savings goals. It can also reduce your financial stress. You will want to put your sinking funds into an account where you can easily reach them. You can track the money in a separate category in your budget, but leave the money in your general savings account. This makes it both easy to save the money and access it when needed.