How to Stop Living Paycheck to Paycheck by Implementing Sinking Funds to Cover Large Purchases

How to Stop Living Paycheck to Paycheck by Implementing Sinking Funds to Cover Large Purchases

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If you have never heard of a ‘sinking fund’ then keep on reading. 

Sinking funds are one of the key ingredients to keeping us on track and simplifying our finances. Stress and many arguments have been avoided as a result of intentionally funding our lifestyle using sinking funds. Learn how to stop living paycheck to paycheck by implementing sinking funds to cover large purchases. It really is that easy. The best part is you can make a sinking fund to save up for anything that’s important to you: an annual vacation, RV purchase, or even real estate properties. Yes, you can have nice things. You just need to save for them.

sinking funds

What is a Sinking Fund

A sinking fund is essentially a pot of money you save up to cover large or irregular expenses. It’s held in a high interest savings account, and whatever money you put in the account, is allocated for spending only in a specific category. For example, property taxes. You would contribute regularly to this savings account, so that when it comes time to pay, you pull from your sinking fund rather than using whatever amount of money you have left over from last payday. The point is to contribute a set amount regularly as part of your budget into this savings account, so that you aren’t surprised and can easily pay off a large expense, like property taxes, with little to no stress. 

Establishing sinking funds allows you to plan ahead, stay on track with your bill payments, and feel more financially secure. Since you will be planning to fund your lifestyle, it will also prevent lifestyle inflation by default, since you will be more aware of how much discretionary income you have without forgetting larger bills throughout the year.

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“Establishing sinking funds allows you to plan ahead, stay on track with your bill payments, and feel more financially secure.”

A Sinking Funds' Ability to Calm Your Finances

A sinking fund takes some planning to set up. It won’t happen overnight, but you can begin to build your sinking funds as soon as you decide how you will be allocating them. 

It’s important to have simple, clear, and focused goals for saving your sinking funds. Use a bank, such as EQ bank, which allows you to specifically name your savings accounts accordingly, and offers a consistently high interest rate. More on this later. When naming your sinking funds, be specific. Instead of allocating the sinking fund for “bills”, make a specific fund for “house”, “holiday gifts”, and “pets”, to keep each fund clear as to what the money can be spent on.

Other than recurring bills, begin to think about what is important to your life. If growing wealth is a priority, create a sinking fund labelled as “opportunity fund”. Do you love to traveling to new places around the world, or have family that lives far away? If visiting them regularly is important to you, label one of your sinking funds as “travel”. This is just one example, but the options are endless. Just remember to spend some time thinking about what;s important to you in life, and what brings you the most joy. I challenge you to spend some time on this, so you can allocate funds to live an intentional life filled with what brings you the most joy. 


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Sinking Fund Categories

The #1 Sinking Fund Category: your Emergency Fund

Before we move on to discuss the essential sinking fund categories, I want to
say that, in my personal opinion, before you establish and start saving for your sinking funds you need to consider your emergency fund.

If you do not have an emergency fund (even $1,000 set aside) this is the first
‘sinking fund’ you need to save up for. Once you have your emergency
fund, you can begin preparing the rest of your sinking funds to help
balance out your finances.

When I had a base amount in my emergency fund that I was comfortable with, I started contributing to it as one of my sinking funds. Once I feel I have enough in there (maybe 3-6 months of income worth) I will stop contributing to this fund until it gets drawn down for an emergency.

Essential Categories for your Sinking Fund

The categories that I feel are essential for your sinking fund are based on what you are obligated to pay for to run your household throughout the year. For us this includes vehicle expenses, and holiday spending on Christmas gifts. Your expenses might include a house maintenance fund, or property taxes.

Christmas gets us every time, even though we budget. This isn’t to say that you need to spend a lot on Christmas, but it’s sure nice when you go to pay that hefty credit card bill over the holidays and you have a good old $800 chunk of money you set aside just to help cover the bill. Phew! Hallelujah! We got this! Do the happy dance ’cause you earned it! SUCH a good feeling. But personal finance is personal. So we need to figure out which categories work best for you.

Personal Categories for your Sinking Fund

These expenses are based on your lifestyle and are geared around your values and goals. In our household, holidays and travel are important, so we have categories for those. We also have an “opportunity fund” category for future wealth generation such as investments in real estate, the stock market, education, business or otherwise. These categories were chosen because they are important to us. Its time to think about which categories are important for you.

Do some brainstorming:

  • What are your large or inconsistent expenses that you have to pay each year? For us, this includes an annual auto insurance payment (nearly $1800!)
  • Think about whether there is a particular time each year that money is tight (after Christmas, over summer break, after celebrating five birthdays in May…etc.)
  • List all of your categories for your potential sinking funds.
  • Identify what you can lump together. For example, if you label one sinking fund “Auto”, the amount in that account could include enough to cover annual insurance, regularly scheduled car maintenance, and a little extra in case of a major repair or windshield replacement. Gas should be budgeted into your monthly expenses, but any larger expenses could be included. 
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How to Fund your Sinking Funds

You will fund your sinking funds by regularly contributing to your savings accounts.

The purpose of the sinking fund will determine how much needs to be saved and how often. 

For example, holiday gifts. In my family, holiday gifts sets us back between $1,250-1,500 each year.  I know we can afford to spend a little more when the time actually comes, but I would like to have about $1,000 saved by the time Christmas rolls around. For me, it works best to have a weekly $20 transaction which transfers automatically from my checking account to my sinking fund. This helps us save up for our holiday spending so our credit card bill doesn’t surprise us at the end of the December. By the time we hit the holidays, I have about $1,040 saved up toward our spending. Your number may be less or more, but it definitely flattens out the fluctuation in our accounts and we aren’t playing magic tricks to pay our credit card bill at the end of December. 

Doing the Calculations

To identify how you should save for your sinking fund, identify:

  1. The amount you need saved; and
  2. The length of time you have until you will need the cash.

So when you use our holiday gifts example above, this is how we figured out how much and how often to contribute. We know the amount we want to save is $1,000, and the timeline is one year, since it’s an annual event. From there, we have a couple options. I would like to know how much I would have to contribute if I did my auto-deposit weekly, and every two weeks on payday. 

So for a weekly transaction, I would need to divide $1,000 by 52 (weeks in a year). The amount is $19.23. Do the same calculation, but divide by 26 for bi-weekly transactions. A bi-weekly contribution would require $38.46 for each withdrawal. There is no right or wrong answer, but I have elected to contribute weekly. We also chose to round the amount up slightly, to $20 each week. After one year of $20/week, we have $1,040 saved up for holiday gifts. 

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How Often Should I Contribute to my Sinking Funds

As mentioned before, how often you contribute sort of depends on how much you want to contribute at once, and how quickly you want to build your sinking fund.

I enjoy weekly transactions since I keep a healthy cash buffer in my savings account (I’m never worried about over-drafting). But for some, since this is like a bill payment, it may be simpler to have an equivalent amount withdrawn bi-weekly or monthly.

Where to Keep your Sinking Funds?

In short, you want to keep your sinking fund in a high-yield savings account. I personally use Tangerine, EQ Bank, and Wealthsimple to stash our savings while ensuring we get some of the best interest rates. For sinking funds in particular, I love EQ Bank. They tend to provide the best interest rate of the above three brands, consistently. And the best part of all, is they are entirely online (no sneaky spending) and you can have, at the time of writing this, up to five savings accounts, or ten accounts if your spouse signs up too. 

Why I Like EQ Bank for Sinking Funds

Other reasons why EQ Bank is one of my fave’s:

  • You can name each of your 5 individual accounts after their purpose. Auto, Taxes, Pet, Holidays, Europe 2022, Medical…you get the idea.
  • You can set savings goals and track your progress
  • Excellent phone application. Their app is super easy to use, shows everything very clearly and makes it effortless to manage your accounts without opening up your computer.
  • If you won’t be spending your sinking fund for a while (ie. Vacation) you can very easily roll it into a GIC (guaranteed investment certificate) for a select amount of time at a guaranteed rate. I do this all the time with our vacation fund; but we’ll come back to that.

Check out the EQ Bank interface. Not sponsored, I just love their setup. It’s super user-friendly and makes mobile banking simple.

You can view each of your accounts, how far you are to reaching your savings goal (green line), and you can easily make transactions from the app. The dashboard shows total holdings, individual account balances, current interest rate, and upcoming transactions. 

You can also set up automatic recurring payments, a one-time withdrawal, pay a bill, deposit a check, send an interac e-transfer, or purchase a GIC, all from the app. 

EQ Bank Sinking Fund

A Sinking Fund Case Study

I want to tell you a story about how a simple sinking fund became a financial stability powerhouse. Last year, I realized I could save a couple hundred dollars if I made one single annual payment on my car insurance rather than the convenient monthly automated payments. I also realized this would eliminate a monthly bill we have to keep track of.

We have a sinking fund entitled “Car Insurance & Repair” where all of our auto expenses are paid from (annual insurance, regular maintenance, repair).

Currently, I have an automatic withdrawal to pay $55 weekly into this account. My costs may be higher than yours, but this will include enough to cover my annual insurance payment, regular services and maintenance, and also if an unexpected expense occurs such as needing new winter tires, or paying the deductible for a windshield replacement. Stuff like that. 

Now that I am more comfortable with our budget, I will try and cash flow smaller services (oil change, etc.), so that (hopefully) our “Car Insurance & Repair” sinking fund will continue to grow. This extra savings could be used in case a major repair is required, to purchase an additional vehicle, or replace our vehicle one day.

Can I Invest my Sinking Funds?

Once you have saved a decent amount of money in your sinking funds, you may begin to wonder if there’s any way to get more out of your money, above and beyond the high-interest rate. When I am using a sinking fund to pay for something in particular, like a vacation, I will invest some of the money in a low-risk GIC knowing that the cash will be available when I need it. 

If you choose to invest your sinking fund, do so wisely.Think about whether you will need the money within the next couple years. If so, invest in something very low risk, and appropriate for your timeline. When saving for a really long-term goal, you can be a little less conservative, but ensure you are aware of how the particular investment vehicle behaves and the level of risk you are taking.

My husband and I are saving for our honeymoon, which we will take on our
third wedding anniversary; just over two years from now. Right now our
focus for our vacation sinking fund is on that upcoming trip. For example, I just enrolled in a 3-month GIC with an interest rate of 2.45%. Absolutely no loss to me since I won’t be needing those funds for a couple years. 

I usually select 2-6 months, when they offer a great interest rate that beats the base rate they usually offer. Since I’m saving for a vacation in three years time, its the perfect way to securely invest my savings without the risk of loss.

The Powerful Triad: Sinking funds, an Emergency Fund and a Cash Buffer

Sinking funds, an emergency fund, and a cash buffer work together to make you feel financially secure. We already know a sinking fund is just a savings account used to save and pay for large purchases, so as to convert one large expense, into a regular, smaller contribution.  

An Emergency Fund is a savings account that you keep so that you have cash on hand in case of an emergency. To start, you may have a modest emergency fund of $500, while you work to pay off credit card debt. Once your finances are in order, you will use your emergency fund to build a savings to a value that could cover months of expenses. Visit this page to dive deeper into how saving an emergency fund can help you to never live paycheck to paycheck again.

A Cash Buffer is simply a set amount of money that you keep in your checking account at all times, as a buffer to keep you from hitting $0 or going into overdraft. AKA “the new $0”.   Visit this page to better understand the immediate benefits of keeping a cash buffer in your bank account.

An emergency fund, sinking funds, and a cash buffer are each their own unique tools to help you plan your finances and reduce stress. It will make the biggest expenses seem like part of your plan and when something goes awry, you know you have the cash to cover it. The combination of the sinking funds, along with the emergency fund and cash buffer are guaranteed to set you on a positive financial path forward.

Final Thoughts

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I used to stress and resent large bill payments. As soon as we were making progress, it felt like it all would go down the drain because something would pop up, such as needing new winter tires, replacing a cracked windshield, or that end of December credit card bill. 

Now that our sinking funds are built into our budget, and set aside for those larger expenses, our money conversations are positive ones, not based on resentment or stress. We’re prepared for the expenses associated with a life we love, and we save money by preparing for these expenses and optimizing. Such as switching to one reduced annual insurance payment rather than paying the service charge to allow for monthly payments. 

Today we covered how to stop living paycheck to paycheck by implementing sinking funds to cover large purchases. Have you already implemented sinking funds? Will you start now? How have you optimized your finances now that you have more control? Share with us in the comments below – we would love to hear your success stories! 

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