The Beginner’s Guide to Dave Ramsey Sinking Funds

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    As you’ve started diving into sorting out your finances, you’ve probably heard that you need a starter emergency fund of $1,000. You may have also heard some talk about Dave Ramsey sinking funds and categories as well.

    But what exactly is the difference between an emergency fund and a Dave Ramsey sinking funds? And why do you need more than one account?

    Lastly, if you’re drowning in debt, isn’t everything an emergency at this point?

    It’s important to not only understand the different between emergency and sinking funds, but why you need each, even this early in the debt repayment game. Especially this early in the game. Without understanding these funds and how to set them up, everything will always be an emergency. And personally, that is not how I want to live – it’s just way too stressful!

    By learning about the differences between these types of accounts, where and how to set each up, you’ll be able to face any upcoming expenses – whether planned for or not – without batting an eye. Sounds amazing, right?

    Most people don't know what sinking fund categories are, or how they differ from an emergency fund. Here's where you'll find the differences in funds, and why you need to be putting money into both savings accounts. #emergency #sinkingfunds #finance

    What an Emergency Fund Is (And Isn’t)

    An emergency fund is for true emergencies. These are expenses that are unexpected and unplanned. Think of things like a job layoff, an accident, big health issues – basically anything that keeps you up at night.

    Sadly, it’s not funds for when you’re too tired to cook and are pouring from an empty cup, there’s a big sale on shoes, or when you’re forgotten that you need a haircut before a wedding(not to mention the tip for the barber).

    For example, our roof was recently damaged during a storm. Since this was an unexpected expense, we took the $1,000 deductible out of our emergency fund at CIT Bank to pay it off, rather than putting it on our recently paid off credit card. Then we’ll use the next 2 to 3 months to build that emergency fund back up.

    Emergency Fund Categories

    • Layoffs
    • Accidents
    • Emergency health bills
    • Unexpected car issues
    • Items that are both unexcepted and unknown

    The general rule of emergency funds is that $1,000 is a good starting point while you’re still paying debt. Once all debt has been paid off, then the suggested amount is 3 to 6 months of expenses (or even more!). Note that I said expenses, not income. It’s about covering your bills if you lose your job or get hurt, not matching your missing income. There’s a big distinction between the two!

    Emergency fund money is earmarked for after something happens. It’s those things in life that you can only plan so much for and generally show up at the worst times.

    If you’re wondering if an expense qualifies, here are some questions to ask yourself:

    • Is it an unexpected expense or was it known about it prior (like a yearly bill)?
    • Is it a want or a need? If it’s a want, it’s not truly an emergency, no matter how good that sale is!
    • Is it urgent, or can it be saved for?

    A great example that’s come up in our house recently is the dishwasher. It’s original to the house, and is on its last leg. Sometimes it works ok, sometimes not. We can live without a dishwasher (in theory!). Replacing the dishwasher is a known expense at this point. It’s a want, not a need, and it’s not urgent. Based off these questions, replacing the dishwasher is definitely not an emergency.

    How Much does Dave Ramsey Say to Have in an Emergency Fund?

    When starting out on your financial journey, Dave Ramsey suggests saving $1,000 for emergencies. He suggests that’s enough to cover any medical emergency or household emergency. This is sometimes referred to as a baby emergency fund.

    After debt is paid off, Dave suggests ramping up your emergency fund to cover potential job loss or bigger emergencies.

    What is a Sinking Fund Used For?

    A Dave Ramsey sinking fund is money that you’ve saved up before something happens, so you’re thinking ahead and planning for expenses you know are going to pop up. Some examples are bills that aren’t paid monthly, car maintenance, and vacation sinking funds.

    The sinking fund method is recommended by financial guru Dave Ramsey to avoid using credit cards or going further into debt. Since it’s something you know you need, you can plan ahead by saving in certain sinking fund categories, and save money to cover each expense.

    A Sinking Fund Example

    Back to the dishwasher example from before – if it dies, we’ve agreed to save up to buy a new one rather than put the cost on a credit card. That is a Dave Ramsey sinking fund. Even better, we could start saving for it now before it dies. This way we’re thinking ahead about our money, rather than starting saving after it dies, which could take several months.

    Examples of Sinking Fund Categories

    • Bills that are not monthly, like water, sewer, garbage, etc.
    • Expected car costs, like tires, oil changes, tags, etc.
    • Christmas
    • Birthdays
    • Vacations
    • Home maintenance
    • New appliances/furniture
    • Quarterly self employment taxes
    • Property taxes
    • Insurance (if not paid monthly)
    • New (to you) cars
    • School clothes/fees/supplies
    • Weddings (or wedding rings)
    • Copays for healthcare

    Why do they Call it a Sinking Fund?

    It’s called a sinking fund in reference to paying off long-term debt and the lowering level of debt as you pay it off. However, we’re avoiding debt by setting these up, so the name is a little goofy. I like to think of it more as sinking money into an account over time to cover an irregular budget item.

    How Much Should I Put in a Sinking Fund?

    Dave Ramsey sinking funds and their amounts will vary based on several factors, including how much time you have and how much money you need in total for each purchase. I use this sinking fund formula to figure out each individual monthly savings amount (I believe there’s a Dave Ramsey sinking funds worksheet, but you don’t really need it):

    1. Write down all expected expenses for the rest of the year that aren’t part of your normal budget
    2. Do your best to estimate how much each will cost (reference an average of last year’s cost if possible)
    3. Add up the total, then divide by how many paychecks you have left for the year
    4. Open a separate checking/savings account and keep the money there
    5. Use a sinking funds tracker to make sure you’re staying on target

    One thing to note is that you won’t have all the Dave Ramsey sinking funds you need immediately. The best way to handle this is to prioritize the expenses you plan to cover with the sinking fund. Arrange them by due date as well as by urgency. This way, the most important sinking fund categories will be covered first, and you’ll have time to save up for the rest.

    Once you’ve prioritized your sinking fund categories, add the sinking fund budget line items to your monthly budget. This way you’ll be sure to pay them first and you’ll stay on track with your savings. If you make your sinking fund contribution first, right after getting paid, you’ll find that you are much less likely for that money to go missing by the end of the month.

    For example, we are going on vacation with our family and owe my parents $500 for our lodging. Since it’s not until next summer, we’re able to divide those payments up into 12. I’ve created a separate savings account just for this sinking fund category and we’ll be able to save up for it easily in $50 monthly increments. That means it won’t sneak up on us and “surprise” us next summer – and no scrambling to scrap up our part of the bill!

    The Best Accounts for Sinking Funds

    One of the best accounts for organizing Dave Ramsey sinking funds is CIT Bank. You can open a sinking fund bank account there, and then you’ll be able to create additional accounts (or sinking fund categories) with no extra paperwork. This is extremely handy when you want to earmark money for certain funds. It also links to your regular bank, so it’ll take a couple of days to move back and forth, but it’s a great way to keep that money for its original purpose.

    This way you have can separate accounts for Christmas, car maintenance, vacations – whatever your heart desires!

    A big mistake that I’ve made in the past is to keep my sinking funds money in my savings account (which also housed my emergency fund and quarterly tax payments, yikes!). As you can guess, I’d dip into it without realizing I was, and next thing I knew…we’d be short and struggling to replace that money come tax time.

    How to Organize Sinking Funds

    I finally realized that the best thing we could do is that every time we get paid, I put those different chunks of money into those separate accounts and keep each fund and category separate.

    That way, we don’t spend what we don’t have, and every quarter, I can easily just transfer the tax money back to my checking account and write a check to pay it. I don’t even have to think or worry about it – easy peasy!

    A Quick Review of Emergency & Sinking Fund Examples

    Emergency FundsDave Ramsey Sinking Funds
    These funds are used reactively for the unexpectedSinking funds are used proactively for bills you know you’ll need to pay
    Used AFTER something unexpected happensSaved BEFORE something expected happens
    Examples: Job layoff, accident, big health issues, emergency car repairsExamples: Christmas gifts, vacations, home maintenance, big purchases, remodeling, extra curricular activities, anniversary or birthday presents and parties
    $1000 until debt is paid off; then 3-6 months of expensesVaries, based on known upcoming expenses

    What Types of Sinking Fund Categories Do You Need?

    This will vary based on each family, but we have sinking fund categories for: Christmas, vacation, anniversary, house updates, and taxes (I know – all the important stuff, right?). This way we can take a vacation without feeling guilty. And we can plan ahead of the kids’ extracircular activities without worrying how we’ll cover it, since they are insanely expensive.

    Not everyone will have the same categories for sinking funds, or even emergencies, which is fine. What’s important is that you’ve sat down and mapped out possible expenses, and have decided to face them head on.

    When Should I Start Creating Sinking Funds?

    This really depends on what your debts are and how quickly (or desperately) you need money set aside for a sinking fund. We chose to wait until we were debt free to start our various sinking funds.

    There are some instances where you know you’ll need the sinking funds before you can become debt free, like paying property taxes or your water bill.

    There are some things that are just going to happen either way – like Christmas. Why not start a sinking fund category for presents, so that in January you’re not afraid to open your credit card statement?

    Having a set amount to use for presents will also teach you how to stop spending money and help you keep within a budget. I’ve found that it can help me to really focus on finding creative and meaningful gifts since I’m spending less.

    I also start earlier in the year to look for presents, so that I’m not last minute buying whatever ugly Christmas sweater that’s on sale (though, that is a thing now, isn’t it?). By creating a sinking fund at the beginning of the year, I have some money set aside every month that I can use to buy presents as I find them without using our credit card.

    Burying your head in the sand and hoping extra expenses will go away if you ignore them isn’t making your money work for you. It’s making you chase your money, and work harder than you need to in order to get ahead. Creating emergency and sinking funds will only lead to making your finances a success, and will reduce your stress if (and when) something happens!

    Ready to start budgeting or want to hear more about ours? Click here to learn how we’ve paid off $26,619 in debt in 17 months!

    You can also learn more about how to use sinking funds to get ahead of your finances here.

    About Dave Ramsey Sinking Funds and Financial Programs

    If you’ve only dipped your toe into the world of Dave Ramsey, here’s a quick synopsis of his work. Dave went bankrupt many years ago and recovered financially. From this, he built a set of baby steps to help others get out of debt.

    Soon after, he followed with a radio show, books like the Total Money Makeover, and personal finance education products like the Financial Peace program.

    Do you have sinking funds and an emergency fund set up? What categories do you include in your sinking funds? Comment below and let me know how you’ve made these types of sinking funds work for you and your money!

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    A forty-ish web designer/developer by day, a budget & financial fanatic by night. I’m a mom, wife, avid reader, and DIY enthusiast who’s tracking our journey to debt freedom. Read More

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    1. Leah | A Relaxed Gal on December 19, 2017 at 1:42 am

      This is a great easy to understand breakout of the diffs between sinking and emergency funds. I have an official emergency fund that I’ve used a few times when I was laid off. I guess I have a sinking fund as well, but I never really classified it as that. The money in that fund is set aside in an account that’s separate from my emergency fund and everyday accounts.

    2. Keri|flipflopweekend on December 19, 2017 at 1:39 pm

      Really nice post. We have an emergency fund that came in handy when we had a major car repair. I never thought of separating the sinking funds from emergency fund, but it makes complete sense. Thank you!

    3. Tiffany Bailey on December 22, 2017 at 8:26 pm

      I would love to be in a position to have an emergency fund and I certainly feel more secure when we do have one!!

      • Beth on October 1, 2018 at 2:24 am

        Check out The total money makeover by Dave Ramsey. He really revolutionized my ideas around money. I’m not a huge saver but this helped me solidify the need for a bigger em fund. Being intentional with our money is a big big way to freedom and peace for me and my husband.

        • Tana on October 10, 2018 at 1:29 am

          Hey Beth! I love that book, it’s a great way to jump into finances and budgeting. We’re still working the steps and it’s a great way to focus on our goals. I love that you mention being intentional with your money, I really think that makes all the difference!

    4. Rachel on December 22, 2017 at 9:27 pm

      I like the idea of calling that a ‘sinking fund’. I totally agree that it’s very helpful to keep certain funds separated from others and will be calling one of mine a sinking fund from now on.

    5. Alyx Kjorven on December 23, 2017 at 9:59 pm

      these are both great funds to have. i never even heard of sinking funds before. learn something new every day!

    6. Kim B Smith on December 24, 2017 at 12:30 pm

      I love how you simplify and explain things. Break it all down into bite-size pieces for the average person! TY!

    7. Bri on December 26, 2017 at 11:20 pm

      This is great information. I so wish I would’ve known all of this and practiced it as soon as I started working 20 years ago 🙁

    8. Marc @ Vital Dollar on September 11, 2018 at 11:36 am

      My wife and I have used sinking funds for years for things like medical bills, vacation, home improvements, and car repairs. It definitely makes it easier when you need to pull money out because you have it set aside specifically for that purpose and it doesn’t feel like you’re taking it out of savings.

      • Tana on October 10, 2018 at 1:27 am

        Marc, that is awesome! We’ve been starting to do the same, and you’re right – it’s a nice feeling to know you already have that money set aside. Keep up the awesome work!

    9. Sandra on July 31, 2019 at 12:54 am

      One by one many years ago, I came to these same conclusions that I was out of control of my finances and had to do something. The first and hardest and most painful thing was to balance my checkbook and list my debts, so I could see where I was at financially. Ouch!

      I decided I wanted a budget that contained no surprises and made it for monthly items and then created a list for all other expenses plus a little extra for a cushion. I worked on paying down my debt, and opened a savings account at a credit union different from where my regular checking and savings was. This became my sinking fund. No more surprises! To get the money for the extra expenses, I had to drive to that credit union to get it. Like you said, it took away the temptation to move it to my checking account. It changed my life. What also changed my life was balancing my checkbook EVERY Friday.

      I’ve only recently heard of a “sinking” fund and your post here helped me understand what it is and that I have been doing the right thing all along. I can not tell you how liberating that first January was when I did not have Christmas debt that took months to pay off. It is so liberating to pay insurances in full when they are due.

      I love your website. This system worked for me so well so many years ago and continues to work for me now. I’m sure there are many people it will help as well.

      One thing I am doing now is to budget my groceries for a certain amount per week for the month. The last week of the month I do my best to not spend the money budgeted for groceries. I shop my pantry and reduce trips to save on gasoline. At the end of the month I move any remaining money in checking including the money reserved for the fourth week into my savings. Even if it is only a small amount, it goes into savings.

      I get paid the first of the month now so it works well for me. When I got paid weekly, I had to save some of the money from my last payday of the month to pay for the house payment that was due on the first day of the next month.

      • Tana on July 31, 2019 at 2:00 pm

        Sandra, that is amazing! We have finally started planning ahead for Christmas and other expenses as well, and it’s a game changer. Before I used to just avoid upcoming expenses, ignore them, and then get irritated when they showed up. Talk about stressful! I’m so glad that you’ve worked out a way to stay ahead. Congrats on your progress and budgeting skills, that is huge!!

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