Sinking Funds: The What, Why, and How.

Sinking funds are the smart, doable way to stay out of credit card debt forever n ever more, especially when you have variable income.

I’ll admit the name can feel a liiiitle depressing, it’s borrowed from traditional big finance, after all.  Don’t be hoodwinked by the word ‘sinking’ though, these funds are life changers.

You can call yours something different if you like.  They can be Bucket Funds, Mary-Goes-Bananas Funds, My-Dog-Has-A-Winnebago Funds.  

It doesn’t matter, just use them <3.  They’re going to save your variable income butt. 

So. Imagine your faithful laptop just died.  Do you go to the Apple Store and pull out the Amex?  Do you transfer money out of the emergency fund you worked your butt off to build?  Neither are great options.

Enter the sinking fund, the savings system you create for yourself, with the intention of spending the money in the future on an upcoming larger purchase.  

That larger purchase you’re preparing for might be a vacation, new business equipment, a house down payment, or your quarterly trip to Costco.  

Creating a sinking fund is simple: you regularly set aside a predetermined amount of money, earmarked for a determined purpose, whether in cash or in a savings account.  

Why sinking funds are so important to use for creative solopreneurs

In the context of our business, sinking funds are huge for us self-employed types.  We’re running our businesses on our own, without partners or investors, and with variable – often unknown – income.  It’s just us in here, making the dough.  And we need all the buttery and yeasty advantages we can get.

Sinking funds make saving for large business expenses feel easy as pie (if pie were actually easy, which it is not, especially the dough). And they smooth out the variable income bumps.  That way, you avoid plundering your tax fund when you need that special expensive ink for your printer.  

Sinking Funds are also a planning framework for your business. 

Setting up a new sinking fund requires a clear practical vision for your work and life.  The process of thinking ahead to future events and expenses, then breaking them down into a solid budget is very empowering, which we like around here ?.

What is the difference between a sinking fund and an emergency fund?

The biggest difference between the two is the intention to spend the money eventually. 

You create your sinking funds knowing you will spend the funds sometime in the next 1-5 years, if not sooner. 

Your emergency fund is essentially self-funded insurance, just sitting there in a savings account in the hopes you’ll never need it, cross fingers and toes. 

How do you get started with sinking funds?

  1. Write down all major expenses you expect to incur over the next 1-5 years
  2. Write down any upcoming holidays or birthdays in the next 1-2 years for which you want to save. 
  3. Write down a name, target date, and target amount for each sinking fund based on the expenses you choose.  
  4. Figure out the weekly or monthly amount that you will put aside for each sinking fund.  
  5. Get clear on which sinking funds are the most important, and prioritize your sinking funds.
  6. Choose if you are saving cash or putting money aside in a savings account (or both).  
  7. If using a savings account, decide if you will use one or multiple savings accounts.  It’s so easy – in the USA at least – to open up multiple fee-free online savings accounts, and transfer money in and out of them. 

    If you decide to use just one account for your sinking funds though, you can track the progress of each using a visual tracker.
  8. Add your sinking funds to your zero-based budget, in order of priority.

Back to that dead laptop

Let’s imagine it’s 3 years before it dies.  You knew your laptop would need replacing at some point, and a new 16” MacBook Pro will set you back approximately $2200.  You decide to create a sinking fund for this future expense.

To set up your laptop sinking fund, you gather the following details.  

  • Sinking Fund Name: New Shiny Macbook
  • Target Date: July 2023 { 36 months, 156 weeks away }
  • Goal Amount: $2,200
  • Monthly Sinking Fund Contribution: $61.11
  • Weekly Sinking Fund Contribution: $14.10

If you are budgeting weekly add $15 per week for your New Shiny Laptop Fund.  If you are more experienced at budgeting and you budget monthly, add $62 per month for this fund.  

When the time comes to replace your laptop, you will have cash to spend, instead of financing it or putting the $2,200 on the Amex.  

And hey, presto!  You have the most almighty feeling of having your shit together without trying too hard!  Because it’s the truth.  

When Sinking Funds Aren’t Working For You

1. You might find you’re overwhelmed by trying to fund multiple sinking funds at the same time. 

A. Like creating your budget, it’s best to start by dividing sinking funds between your needs and your wants.  For example, car or business tech expense funds are needs.  Vacations and holiday spending funds are wants. For now, focus on building the discipline to fund your ‘needs’ sinking funds every time you budget. 

B. Once you have a workable list of sinking funds you’re tackling, prioritize them by knowing their importance and end dates.  The cost of attending a major professional conference in 8 month might be higher up the priority list than your planned trip to Hawai’i in 2 years.  Or not.  These choices depend on your life, intentions, and values.  There’s no wrong way to prioritize.?

2. You might feel a lack of progress despite diligent sinking funds savings over many months.  In this case, try putting your visual trackers in a more prominent place, or reduce the number of funds you are working on at the same time.

Special note about Rolling Sinking Funds.   

Rolling sinking funds are the flexible cousin to your regular sinking funds, and are more like your variable spending categories in your budget.

Over the course of a year, you fund your rolling sinking funds, pull cash from them as needed, and then replenish them again.  

An example might be vet bills for Piper (one of my many future dogs).  

Or vehicle maintenance expenses for Dame Swift (my future motorbike). 

The most precious of rolling sinking funds, especially when you are self-employed, is the Rollercoaster Fund.

For each rolling sinking fund you have, you track all incoming and outgoing money on a register.  And logging those debit and credits can become a simple addition to your regular expense tracking activity.

Let’s wrap up this Sinking Fund Guide with a bow!

Used correctly, sinking funds quickly become a major workhorse in your finances, getting all the heavy lifting done for you. 

Side note, I’ve worked with a giant farming draft horse before: exhilarating and terrifying all in one.  

Sinking Funds protect you from credit card debt, and help you keep your finances stable when you have the variable income that naturally goes along with being a self-employed small business owner.  

Drop a comment below and let me know what’s the first sinking fund you’ll create!