6 Primary Sinking Fund Categories You Need to Have

What is a sinking fund?

A sinking fund creates funds you set aside towards a bigger purchase that will happen throughout the year. The idea here is that if you set aside small chunks of money throughout the month and the year, it's not throwing your budget way off whenever the big purchase comes along.

Think of things like Christmas or a car repair that are good examples of a potential sinking fund you might have, and you are slowly setting money aside for that all month. It is essential to realize your categories, follow through, and put money into those categories.

6 sinking fund categories you need

This mainly targets those of you who have not yet started but want to start sinking funds or savings challenges. You could easily set up a savings account if you are not into cash budgeting. If you have not yet started sinking funds or savings challenges or have already bought binders but now feel overwhelmed, this applies to you.

Starting with sinking funds, I think everybody needs to start with two savings or emergency accounts, two wants or fun accounts, and two needs accounts. Those are the six loose categories of sinking funds.

Your detailed six accounts will look different than mine because everybody's life looks different. For example, one of my wants accounts is saving for back-to-school things for the boys. That may not be a want that fits your lifestyle. So let's break this down into basics.

1. Two savings or emergency account categories

Everybody should have two savings or emergency accounts for obvious reasons. There are emergencies that come up. There are needs that happen.

Examples of emergency or savings might be having enough to get one month ahead on your bills. I consider that an emergency or a general savings account. Getting ahead on your bills is a good cushion to have.

Another one might be for general emergency savings. Whether that goal is $1,000 or $5,000, you could do different things with it. It's a general savings fund for emergencies that may come up.

For emergencies or savings, I think everybody should find a couple of categories that motivate them. You have two envelopes dedicated to emergency or savings categories.

2. Two wants account categories

I think everybody should have two categories for their wants. Some examples of things that would go in the wants category would be a vacation or splurging on back to school or Christmas.

We don't need Christmas presents, and we don't need Christmas money, but it's nice to have. It's a want for me.

Birthdays are another thing that I put in the want category. It won't make or break our year if we don't go over the top for birthdays or have a big celebration, but it is a good example of a want sinking fund.

3. Two needs account categories

I think everybody should have two accounts in the need categories. Once I give some examples, we will talk about why I think it should be broken up this way, but some needs might be car maintenance or car repairs.

If you own a car, repairs are going to be needed. You need to be saving for car maintenance and car repairs.

A washer and dryer is another good example of a need category for sinking funds. Another category might be new clothes for kids. If you have kids, you know they're constantly growing. I consider that a need category. We will also put debt in this need category.

Why the six categories?

Now that we've talked about what a sinking fund is and what some examples of emergency, wants, and needs categories are, let's talk about why I think you should have six categories to start with.

As somebody who has used this cash budgeting system, as somebody who has been using savings challenges and sinking funds for a while now, I have seen this method, and these ways help me get control of my finances and motivate me.

Motivation is a keyword of why I think you should start with six. Six categories are a great starting point, so you don't feel overwhelmed.

With the emergency and savings category, I find those to be the least motivating because they are the vaguest. I don't know what they will go towards except if I'm doing a month ahead. Even so, everybody should have savings, and everybody should have an emergency fund.

The same thing applies to the needs categories. I think it's important to have a couple of needs in there, like car maintenance and car repairs, and if you own an older washer and dryer, a need category for you might be washer and dryer, as I said. It feels nice to know that some of your stressors already have money going toward them.

Having two wants in the mix is important to me because it is sort of the thing that will motivate you the most, in my opinion, to keep going. While it feels nice to take some of the mental load off to know that you are saving for your car repair, car insurance, or a new washer and dryer, it feels like you're just doing more adulting with all your money.

If you have a couple of fun categories like vacation, Christmas money, and birthday money for yourself or a loved one that you want to celebrate, those are the categories that excite you when you sit down to do a cash budget.

Suppose you have $400 for the month to put into your sinking fund or savings challenges. In that case, you will be excited to sit down to budget because you'll know you get to put money into my vacation fund, I get to put money towards Christmas, and I need to put money towards my emergency fund.

The best sinking fund categories

Today was all about how we can better organize and use our finances to give us the life that we want and the life that we deserve. Do you do cash budgeting? Share your tips for creating a system that has worked for you in the comments below.