Question: What Categories or Events Should I Have Sinking Funds for?
A sinking fund is a way to save up for expected expenses. Basically you are setting aside the money now, because you know that you will need it later. If you are planning carefully and you are aware of your usual expenses you should be able to avoid most financial emergencies (saving your emergency fund for the possibility of job loss) and save in advance for what many people consider emergencies. You should prepare for these unexpected events, beyond just having an emergency fund in place.
You can have a sinking fund for car repairs and another for home repairs or remodels. Most people will set aside money each month to cover home repairs or care repairs and not even realize that this is as inking fund. The truth is that you will need eventually pay for a car repair or for the plumber to come and fix somthing at your home. Putting aside a little bit each month now will make a stressful event easier to manage.
You can also have a sinking fund for vacations. It is best to always pay cash your vacations. If you have a dream vacation you want to go on, or you just want a chance to go to the beach each year, you should set aside money to cover your vacations. Nothing ruins a vacation faster than knowing you really cannot afford to be there.
You can also have a sinking fund for medical expenses. If you have a high deductible health insurance plan, you may already have a sinking fund for this with your health savings account. You can work to save up enough to cover your annual deductible and you should be able to handle the rest of your medical expenses without too much trouble.
You can also plan one for any major purchase, so that you can pay for it with cash. You may have a sinking fund for the next car you are going to purchase. Saving up for your big purchase or a down payment on your home will help you to avoid going into debt and make it easier to purchase something you can truly afford. This is a big step if you are working on becoming debt free.
Setting up your sinking funds now will make it easier to reach your other savings goals. It can also reduce your financial stress. You will want to put your sinking funds into an account where you can easily reach them. You can track the money in a separate category in your budget, but leave the money in your general savings account. This makes it both easy to save the money and access it when needed.