Sinking funds & how to avoid Christmas debt: a key budgeting tool for 2022
As we dive into the first month of 2022, you might be reflecting on the past twelve months and what you hope to accomplish in the new year.
While some might want to recommit to their workout routines, practice mindfulness more often, or make major career moves, you’re likely here, reading this post, in the hopes to have a more sound financial footing this year and in the years beyond.
I want to share with you my favorite budgeting tip I picked up in 2021 from The Budget Mom’s YouTube channel - sinking funds! I think implementing sinking funds in your budget is a crucial part - maybe THE MOST CRUCIAL part - to staying on track with your financial goals in 2022.
What is a sinking fund?
A sinking fund is usually defined as money set aside to eventually pay off a debt or replace an asset that has been used up or depreciated significantly in value (such as a car). In this article, we’re using the term sinking fund as money set aside for any large expense you expect to occur in the future, like Christmas gift shopping or vacations.
According to CNBC, Americans owe an average of $1,249 in debt after the 2021 Christmas season and I’ll admit that I’ve been part of this group of Americans myself in years past - knowing logically that Christmas is a yearly and costly event, but being “surprised” by that cost of shopping for my large family each year (usually buying gifts for at least 18 people annually). Aside from the gifts, there’s Christmas cooking, decorations, and holiday events or travel to see loved ones!
If Christmas or vacations don’t get you in trouble, perhaps surprise medical expenses do (hello, $1,500 wisdom teeth bill my insurance didn’t cover) or birthdays for your partner, children, or parents. Maybe it’s impulsive clothes shopping, furniture for your new place, or car breakdowns. Whatever it is, it’s time to sit down and think about the major expenses that reoccur year after year and acknowledge their place in your budget.
Do you need a sinking fund?
If you have found yourself surprised by major expenses year after year - going into debt on months where special occasions come up (Christmas, major birthdays, travel, etc.), then sinking funds are definitely for you!
These events “surprise” us - but they’re actually quite predictable and can be planned for! The peace of mind of knowing you’re covered for these events is priceless.
Setting up your sinking funds also gives you a good idea of if what you’re spending throughout the year on major events is actually reasonable for your income. I was disappointed to see that I couldn’t save for everything I wanted… but also felt more confident that the money I was saving for a specific goal wouldn’t be erased by some surprise expense - I felt in control of my life and my future goals instead of scared that the rug would be pulled out from under me.
Pros of using sinking funds
Peace of mind knowing that you’ll be able to cover the expenses that are most important to you
Realistic goal setting and a better understanding of where your money goes
Never go into debt over predictable expenses like birthdays and Christmas again
Large goals seem more achievable - a $2,500 yearly vacation seems much more doable when saved for at a monthly amount of $209 per month
Cons of using sinking funds
Realistic goal setting might mean coming to terms with the fact that what you spend each year is not actually within your means - you might have to cut a few things, postpone some goals while saving for others, or spend less than you might have otherwise to avoid going into debt
Because you’re spreading out major expenses across the entire year, you’ll have less spending money month-to-month as you move some of your previously “free” spending cash into sinking funds
Where to save sinking funds
While some might recommend the cash envelope method even for sinking funds (which I’m eager to try one day but still feels too inconvenient for my day to day life), I’m still currently doing everything online.
I recommend opening a saving account with Ally or Yotta Bank as both of these banks allow you to divide your savings into “buckets” or categories, which will let you easily organize, set, and track your savings goals. When you decide your categories, you might need to “pre-fund” some of the categories (if you can) depending on the goal date of which they’ll be spent.
For example - My anniversary and Valentine’s Day are both in February so I pre-funded that bucket with $250 in December when I decided on my sinking fund categories. When I spend that sinking fund in February, it will be $0, and I’ll continue saving year-round in March to reach my $300 annual goal by my next anniversary.
Example of my Yotta account saving categories for some of my sinking funds with the money I’ve saved in January
I use the EveryDollar app to budget my monthly expenses and have organized all my sinking funds from most expensive to least expensive.
My 2022 Sinking Funds & Ideas for You
To give an example of some sinking funds you might have, I’ll share my own and discuss how I arrived at each number and what goals didn’t make my list this year.
MY SINKING FUNDS:
Renovations (or down payment)
Vacations
Furniture
Christmas
Property tax/income tax surprises
Birthdays
Medical
Home maintenance
Mother’s/Father’s/Grandparent’s Day
Charity
Other business/forgotten expenses
Anniversary/Valentine’s Day
OTHER IDEAS:
Wedding/Engagement
Car purchase
Having a child
Going to college (retraining, continuing education, or sending your kids college) or getting a professional certificate
Investing in or starting a business
Expensive entertainment experiences you’d one day like to have - going to the super bowl, sitting front-row at a basketball game or concert
Pet care
Insurance (auto insurance, pet insurance, and/or home insurance if you don’t have a mortgage)
Annual subscriptions
Wardrobe refresh/new clothes
Sports gear/equipment for yourself or your kids
Hobby expenses (new camera, ski gear, etc.)
Fitness equipment (Peloton bike, at-home rower, FightCamp or other at-home boxing setup)
Breakdown of my sinking funds:
A screenshot of my sinking funds percentage in the EveryDollar app
Renovations - $1,666.67 per month
Annual goal: $20,000
I purchased my primary home back in December 2020 and it has been… a nightmare, to say the least. I ignored red flags in the purchasing process and am paying for it now. This year I am hoping to finish the floors that I partially DIYed to save money, which will include paying for new baseboards all throughout the house. I am also hoping there will be money in the budget for new stairs and railings, plus a new kitchen countertop, backsplash, and sink (which is peeling because the previous owners painted to make it look beautiful while selling it to us…). This doesn’t cover all the work the house needs, but certainly gets it to a better state.
Don’t have a home? This could be a down payment fund. Or maybe you do have a home but you don’t have major renovations to complete, but you might want to update some light fixtures here and there and have a professional install them. I recommend looking up the cost of materials and services for projects you might want to complete and starting to save up for it now!
Vacations - $417 per month
Annual goal: $5,000
Think about your vacations you’ve taken in years past - you probably have a personal trip (or two) you like to take with your partner, friends, or kids each year, whether they’re small weekend trips or week-long holidays. For me, though, I live across the country from my family and every year I end up spending thousands on plane tickets to get to Arizona and/or California from North Carolina. This year, I’ve finally decided to acknowledge this annual expense and make it part of my budget so I can focus on enjoying seeing my family instead of stressing over the bill.
Don’t forget to include the cost of food, local travel, daily or long-term parking decks, and entertainment in this budget! Travel expenses are much more than just plane flights and accommodations! I also went on a ski trip for the first time in a long time this year and affording the ski lift tickets, gear, and snow clothes, was… shocking!
Furniture - $200 per month
Annual goal: $2,400
Ever impulse shop throw pillows at Target? Bought plants for a YouTube backdrop on a channel you might or might not have actually started? This category is great for expenses like that. It’s also great if, like me, you moved and are trying to add furniture (like a dining table) to rooms you’ve never had to furnish before. I’m also severely lacking in artwork around the house and desperately need storage furniture, like shoe racks and more clothes hangers. If you can relate, add this sinking fund to your list.
Christmas - $167 per month
Annual goal: $2,000
Ah, yes, the muse for this post. Christmas is what made me realize I needed sinking funds in my life. I calculated this number by writing down everyone I shop for in my family and my boyfriend’s family and stating what I was willing to spend per person. I then added a little extra for stocking stuffers, decorations, and Christmas cooking and baking. Done!
Be sure to look back at what you actually spent last year to make sure you’re being honest with what you really spend. You might have to come to terms with either spending less month-to-month on yourself to afford Christmas OR that some people will get less extravagant gifts this upcoming year!
Property tax/income tax surprise - $167 per month
Annual goal: $2,000
This year I was surprised by over $1,000 in property tax that my mortgage lender was short in collecting from me. Two years ago I was surprised by $500 in income tax I needed to pay the IRS. This year - I’m done being surprised. If I end up not needing the money, great! It will sit there for 2023 and I can remove it from my monthly budget. If I do end up needing it? Cool, I’ll keep replenishing this fund year-after-year.
Birthdays - $125 per month
Annual goal: $1,500
I tend to spend a lot on my partner, parents’, and grandmother’s birthday. After that, there are smaller birthdays here and there where I might send someone a gift or treat them to dinner and drinks. If I were to spend $200 for my partner, mom, dad, and grandmother - that alone is $800, or over half of this sinking funds. While $200 sounds like a lot, it’s easy to do when covering dinner, drinks, and dessert for multiple people, a gift, a card, cake with small accessories like numbered candles, and flowers.
Medical - $125 per month
Annual goal: $1,500
I consider myself pretty healthy and always thought that, when needed, I could cash flow a $40 copay here and there. But then one year I had a $3,000 emergency wisdom teeth removal right before Christmas and my insurance only covered a little over half of it. I thought, surely next year would be better… but then had a $600 surgery. I decided to keep this fund for myself and my partner, so that we don’t have to live in fear of surprise medical bills ruining our plans. Even if you haven’t been surprised like I have, consider this an extension of your emergency fund. It never hurts to be prepared!
Home maintenance - $85 per month
Annual goal: $1,000
If you rent, you likely don’t need this sinking fund. I personally pay $85 per month for my rental property to be bug sprayed every quarter and have had to pay $600 when the AC unexpectedly broke (it was a less than two year old home so I definitely didn’t imagine needing to have large savings for repairs like that). I’ve also had my cat bring fleas inside an apartment I was renting before and had to pay exterminators plus dealing with small things like water leaks at doors, etc. This fund gives me the ability to keep both my primary home and rental home in good condition.
Mother’s, Father’s, Grandparent’s Day - $75 per month
Annual goal: $900
I actually forgot about this one when I set up my budget in December, but I typically spend $200-$300 on Mother’s, Father’s, and Grandparent’s Day. It sounds like a lot and it is a lot… but usually I end up treating myself, my partner, both my parents, and my grandmother to a dinner out on these days and dinner, drinks, and dessert for five people is NOT cheap! Add a gift, flowers, and a card (which for some reason is now $7 from Target - I’ve heard a pro-tip is to get all cards from the Dollar Store - seriously, no one will ever know), and you can see how a day like this adds up to at least $200.
Charity - $75 per month
Annual goal: $900
I sponsor a little girl in Guatemala and like to send around $200-300 quarterly to her and her family. I know - the annual goal here is only $900! That’s because she is included in my Christmas fund, so I don’t add the 4th quarter of the year’s spending to this specific fund.
Other business or forgotten expenses - $50
Annual goal: $600
I have quite a few business expenses - blog website and mailing services, editing software, rental home agent fees when it comes time to get new renters, etc. I am using this as a catch-all fund for anything I left out. As expenses I forgot to account for come up, I’ll be able to pay them in the moment - and then evaluate if I want to cancel or reduce them for next year.
Anniversary/Valentine’s Day - $25 per month
Annual goal: $300
My anniversary falls the weekend after Valentine’s Day so it’s a bit of a double whammy around this time of year. I wanted to have enough saved up for some chocolates and a fun date night out - maybe even including a staycation at a hotel in Uptown Charlotte or some other city within a reasonable driving distance. If you tend to buy a new dress to go on a date for Valentine’s Day or get your hair done, consider this fund for that! Just make sure to be honest with yourself about what you usually spend and what you can actually afford to spend!
The hidden benefit of a sinking fund…
When I was attempting to renovate my house in 2021, I was disappointed with how little I actually accomplished with my money by the end of the year. I thought - I make around $10,000 each month, why the heck can’t I save for the $11,000 window replacement I desperately need? As my partner hinted more and more about getting engaged, I wondered, why can’t I save $10,000 for a wedding each year? Don’t I make enough?
After writing down ALL the places my money was going, it was shocking to see my yearly major expenses added up to $3,177.67 per month, or $38,132.04 per year.
After also subtracting two mortgages, personal saving and investing, food and eating out, some debt repayment for redoing my master bathroom, and other various expenses - it dawned on me that no, my high income didn’t yet afford me the ability to be lax with my spending and still accomplish my goals.
I slashed “Wedding” from my sinking fund categories until I’m actually engaged and I decided windows can be revisited after other major renovations are completed, perhaps in 2023.
There was sadness in accepting that I couldn’t do all of the things that I wanted as quickly as I wanted to do them, but also a sense of confidence in knowing that my other goals were what I truly wanted to prioritize and that they were, in fact, doable. It was a tough decision, but it was an intentional decision. There was no more wondering why I couldn’t afford something - I knew exactly why and I was confident that that why was something I was okay with - because that why was “I’m prioritizing other expenses that are more important to me right now.”
I hope sinking funds give you the same peace and clarity that they gave me. Happy New Year’s!