How I use ‘sinking funds’ to better manage my budget and avoid bill shock

Earlier this year, I found myself between jobs. The news came out of the blue, and I had to reassess my spending while I looked for work.

The situation would have been much more difficult had it not been for my sinking funds.

If you haven’t heard the term before, a sinking fund simply means money put aside over time for a particular purpose, like a big bill.

By having sinking funds set up, I didn’t have to worry about forking out for large expenses in one go as I’d already saved for them ahead of time. 

How sinking funds have helped me budget

Before I learnt how to better manage my finances, I would pay large bills — such as quarterly energy bills — with my latest pay cheque.

It meant I’d often come up short when it came to other smaller bills due that month, leaving me with little spare money and relying on credit cards to pay for things. 

It was a vicious cycle that I may have been able to avoid with better forward planning.

I’ve found that setting up sinking funds helps me avoid dipping into savings or using credit cards, either because the bills were unexpected, or I just didn’t have enough money at the time.

How sinking funds work

You can use sinking funds for anything you like, but they’re commonly used for larger bills that are yearly or quarterly.

Personally, I focus on quarterly utilities and larger bills like registration, roadside assistance, car maintenance and Christmas. I find it easy enough to save for smaller expenses over one or two pay periods rather than using my sinking funds.