Rise up with a sinking fund


I found out that my car needed some work recently. My mechanic quoted me a figure that initially made me stagger a bit. I don’t know why I was surprised, as anything having to do with a car that’s not an oil change always costs hundreds of dollars. But after an initial shock, I realized that my gut reaction was a bit out of date.

What did I need to be worried about? I had a sinking fund.

Christmas comes every week of the year

When I was a kid, my mom would get this little book each year from her bank, the size and shape of a check book, and it contained a weekly deposit slip. I believe it was called the Christmas Club. (I guess I’m old enough to remember a world before we were sensitive to those who didn’t celebrate Christian holidays.) At the beginning of the year, she would deposit a fixed amount of money away, and then by the end of the year, she would have enough to pay for whatever holiday expenses she would incur.

I don’t hear about “Christmas Clubs” (by any name) anymore. The closest thing that I hear about are these “round-up” savings plans, where the bank will round up a debit card purchase to the nearest dollar, putting the remaining cents into a separate savings account. Could it be that the reason why banks don’t talk about “Christmas Clubs” anymore is because they have realized that they can make much more money from issuing credit cards to us than from the interest earned on money placed into savings? Unfortunately for us, they’re right.

But anyway, you don’t need a bank to tell you to put money away each month, or how much. You can do this yourself.

That sinking feeling

A sinking fund, in a personal context, is a savings location where money is put away over a period of time to pay for a future expense. It’s like a savings account but for a specific purpose.

I’ll use the car as an example again. If you own a car (and in America, you probably do) then you will eventually need new tires. They wear out; this is just physics. And if you know approximately how long your tires will last, you can create a sinking fund for it.

Say you just bought a set of tires that are rated for five years (60 months). Now, let’s assume that you spent $500 on those tires and plan to spend approximately that much again. Once again, we have some simple math:

$500 / 60 months = $8.33 dollars a month

So if you put away $8-9 a month, you’ll have enough money for those tires when you need them. That certainly sounds less intense then getting walloped by a $500 charge.

What about something bigger? Say you own a home, and you need a new roof. I have no personal experience with this, but let’s say a roof costs $10,000 and you have to put one in every 20 years. Math!

$10,000 / 240 months = $41.67 dollars a month

Now we’re talking about a fair bit of money, of course, but no one ever said that buying a home was any cheaper than renting (well, except for some real estate agents, but consider the source).


Now, if you look around in your life, you can quickly see that if you were to create a sinking fund for everything that periodically needed to be paid for, your picture would complicate very quickly. And as I’ve continually said, simplicity is usually a key to success. I don’t mind difficult, but I generally like to improve on complicated.

So perhaps a sinking fund for every little (and not-so-little) thing isn’t the way to go. So I suggest this method instead:

  • A sinking fund for the big expenses
  • A group sinking fund for categories of expenses

A down payment for a house merits its own fund, but I don’t have a “car tire” sinking fund. I don’t think it’s worthwhile to get that granular. That said, with a car, it may be tires this time, but it’ll be brakes next time, or an alternator, or (heaven forbid) a transmission. It’s not an question of if you’ll need these things, it’s when. So have a general car fund.

Not an emergency

I should note here that a sinking fund is not the same as an emergency fund. An emergency fund is for emergencies. An emergency is something unexpected, like a hospital visit. A sinking fund is for those things that are expected. Like car repairs. Like holiday gifts, assuming you’re into that sort of thing.

I’ve been working on my car sinking fund for most of this year. so the reason why I relaxed after my initial freak out is because I realized I could now just transfer the appropriate funds from my car sinking fund to my checking account, and pay for it outright. No donations to the credit card companies necessary. Give it a try.

But enough about me. Do you use sinking funds? What would you create a sinking fund for?

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