Sinking Funds Examples

What Are Some Sinking Funds Examples?

Well, before we jump into some sinking funds examples, let’s take a step back and define what a sinking fund is. So…

What is a Sinking Fund?

Check this post out for the meaning of a sinking fund, and the purpose of a sinking fund.

This post is about sinking funds examples.

1. Emergency Fund

So, you just started your first, adult job, and you’re finally making money but don’t know where to start. Or, you’ve depleted your previous emergency fund because something unexpected happened. Either way, an emergency fund is a great place to start saving up for, because things happen all the time!

An emergency fund can be used during times of financial hardship and need: unexpected expense or income loss. It can cover things like medical bills, car maintenance/repairs, and more! Rather than dipping into your savings or retirement accounts, by putting aside a set amount every single month, you can build up an emergency fund that can be used to cover expenses that come up during times of financial need.

2. Vacation

Flights, hotels, public transportation, everything adds up pretty quickly when you’re traveling. The last thing you want to be stressing about is the overall cost of everything.

That’s why creating a sinking fund for vacations can be super useful and minimize your stress.

Using a sinking fund can allow you to find deals or discounts, based on how early you’re booking and when you’re planning on going. Additionally, you’ll have time to think of all the categories you’d want to add as part of your vacation, while adding a contingency buffer.

So that when you’re on vacation, and something unexpected happens, you won’t have to stress about whether or not you’re able to afford something! Now you can vacation stress-free, or at least stress-free about your finances!

3. Home Renovation

Renovations are notoriously known for going over budget. So, how do you go about it without stressing about it? Budget for it. Use sinking funds to create a savings plan for it.

Home renovations as another sinking funds examples helps you prioritize which aspects of your home you’d like to prioritize, maintain focus, and minimize impulse purchases/overspending.

4. Car

Regardless of whether you’re purchasing a new or used vehicle, cars can be quite expensive. If you don’t need a car immediately, building a sinking fund for a new (to you) vehicle can help prevent you from going into debt or putting yourself in a bad financial situation. Remember, if used properly, debt can be useful.

Creating a sinking fund for buying a new (to you) vehicle can be very effective, because you’re setting aside a fixed amount towards the fund every single month.

Therefore, the amount of money you save up can help to build up a nest egg; helping you avoid putting the car on a credit card or auto loans with potentially very high interest rates.

5. Furniture/Appliances

Buying the house is one thing, furnishing is another! Furniture can be quite expensive. In fact, when closing on a home, your agent might tell you not to go out and buy a bunch of furniture, as that will impact your credit utilization. So, furniture is, without a doubt, expensive and a large expense. So much so that, you might opt to use sinking funds to budget for it!

By creating a sinking fund for furniture/appliances, this helps you budget and plan for when you actually make the purchases! This also allows you to snag some really great deals, wait for sales, and allows you to purchase higher-quality pieces as opposed to the cheaper items that won’t last the test of time. Doing this helps you get the best value for your dollar!

6. Wedding Expenses

Weddings can be quite expensive, so using the sinking fund tool can help you to save up for all the associated wedding costs. For example, some of the expenses you can save up for include the venue, flowers, photographer/videographer, attire, travel costs, and more! By saving up for it in advance, you can avoid potentially going into debt in order to pay for the wedding. This will help reduce the (many) stresses associated with planning a wedding!

7. Education Costs

School’s expensive. College nowadays costs an arm and a leg. This is why there are a lot of financial options to assist with further education (grants, loans, financial aid, etc). As a way to prepare for college, parents have the option of investing in a 529B for their kids. However, if you’d like to save for education outside of the 529B, or for education expenses not covered by the 529B, you can use a sinking fund to save up!

Education expenses can include college, trade school, and more.

8. Down Payment

Purchasing a home, aside from taxes, is the biggest expense anyone can make in their lifetime. (Try naming another purchase, I dare you!) Unless you have a massive income where it’s quite easy for you to put away large lump sums of money, like many, you’re probably saving up for a down payment the way many people opt for. Essentially, they create a sinking fund, dedicating a certain amount every single month, and putting that aside for when it’s time to purchase the home.

Now, there are some people who save for a down payment by investing it in the market; however, that largely depends on your time horizon. If you’d like to purchase within the next 5 years, it’s safer to save the down payment in cash. If it’s longer than the 5 years, you could consider investing it, but understand that the market can be volatile, especially during the time you want to make the purchase. So if you can stomach the volatility, go ahead. If not, it’s safer to stick to straight cash.

9. Car Insurance

Oh, adulting is fun. You don’t want to be caught without car insurance, as that can end up costing significantly more than the car insurance itself. So, while car insurance isn’t as high as purchasing a new vehicle itself, the cost of car insurance can be quite high as well. In fact, one of the bigger annual expenses is car insurance, though that largely depends on the type of vehicle you have, how old it is, and whether or not you’ve had any at-fault accidents in the past 3 years.

Typically, you can pay for car insurance every month or 2x a year in a lump sum. My recommendation as stated in this post, is to pay in a lump sum as that typically saves you more money. Usually, paying car insurance every month is more expensive as they add service/transaction fees, and additional fees since it’s riskier for them in case you don’t pay every single month. So, to incentivize you to pay more upfront, they’ll decrease the total amount you have to pay.

However, paying in a lump sum 2x a year can be a big hit on your account, which is why it’s recommended to create a sinking fund for car insurance. This way, you can still “pay” it monthly, but pay yourself by setting aside the same amount as you normally would every month.

To reiterate, you can apply the sinking funds tool to the following sinking funds examples: