My first budget was basic and made up of just my regular monthly spend. I quickly realised something was off and I needed to make adjustments fast.
I learnt about sinking funds from Instagram FIRE community and it made a lot of sense. Sinking funds are money you put aside to pay for one off payments when they come up. An example is a car insurance payment of €300 that is due every August. This works out to €25 per month so you include this €25 in your budget every month and physically move the money into a separate sub account or consciously track it in your budgeting tracker knowing it’s not available for you to spend. Now it’s August and the payment is due. The magic happens as you don’t have to do anything extra versus a regular month. You just transfer the accumulated savings for the car insurance payment to your spending account and make the due payment. And you continue the cycle of putting €25 into the car insurance sinking fund every month.
Sinking funds smoothens out your budgeting and protects you from surprise spending. One key benefit is it ensures you don’t get into debt as you are ready when one off costs pop up. It also enables you maintain a set savings rate and have control of your budgeting.
I use sinking funds heavily and whenever I get a surprise one off cost I missed, I just create a new sinking fund for it. My broad sinking fund categories are family, health, subscriptions, self-care, insurance and child fund. In my family sinking fund, the sub categories I have are vacations, family visit and gifting while in health sinking fund I have replacement glasses, health insurance deductibles and teeth fund.
When I started tracking my budget, I quickly realised I was spending a lot on gifting and gifting had a high correlation with how stressed I was at work. To help myself improve in this area, I started a sinking fund which became a good indicator of the max amount I’m allowed to spend on gifting. I also started gifting differently and planning ahead for it. These two actions reduced my gifting spend by over 50%.
My latest sinking fund category is a hobby sinking fund. Oh well, I’m spending a lot on gardening and craft so it makes sense to plan for these spend monthly.
I recommend having a sinking fund even if you don’t split into categories or not sure what this spend will cover at the beginning. Just put some money aside for unexpected cost and start tracking when the spend pops up. By the end of a 12 month cycle, you will have a good understanding of what categories should be covered in your sinking fund.