Sinking Funds: How We Save in Baby Step 2


Gasp, you’re saving in Baby Step 2?!

Before we explain how and why we are “saving” in Baby Step 2, let’s step back and simply explain our financial situation, describe what ‘Baby Step 2’ is, and define what ‘sinking funds’ are.

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Our Financial Situation

Bad news: we are currently in debt! Good news: we have a plan to get out of debt. We are following Dave Ramsey’s plan, from his book, The Total Money Makeover, and working The 7 Baby Steps – we are currently on Baby Step 2, paying off all consumer debt.

Debt Free Journey Coming Out Letter

How We’ve Paid Off $14,076.71 in 3 Months

Dave Ramsey’s 7 Baby Steps Summarized

Baby Step 0: Commit to not going into further debt (cut credit cards) & get current on all bills

Baby Step 1: Save $1,000 for starter emergency fund

Baby Step 2: Pay off all consumer debt (everything except the house) using the debt snowball method

Baby Step 3: Save 3-6 months of expenses in the emergency fund

Baby Step 4: Invest 15% of your household’s income into retirement

Baby Step 5: Start saving for kids’ college

Baby Step 6: Pay off your home early

Baby Step 7: Build wealth & give

As you can see, after we saved our $1,000 for the beginner emergency fund, there’s technically no further savings until Baby Step 3!

Sinking Funds

Since we’re on Baby Step 2, we have committed to not going into further debt. We’ve cut and closed all our credit cards, and are cash flowing everything. Therefore, we have to be very smart about preparing for all expenses.  We need to plan for big and upcoming expenses.

Sinking funds are a fancy finance term for “savings”. Sinking funds are specific to an expense or purpose, making them different and separate from the emergency fund, as the emergency fund is set aside for the unknown.

The best example of a sinking fund is Christmas. It comes every year in December! Be prepared for the holiday season by putting aside money each pay period, instead of charging an un-budgeted and high amount to a credit card because you did not plan for this large expense. Simply divide the total amount you need for Christmas by the number of paychecks you have until you want to shop for Christmas.

Our Current Sinking Funds

Listed below are our current sinking funds and the total amount of what we are saving on each paycheck in the month of July.

Sinking Funds Savings in Baby Step 2

Note: We have 3 paychecks in July, as my company is changing our pay day cycle. I’m paid bi-weekly. My next paycheck, on July 7th, is a full 2-week’s worth – the last pay day on that cycle. On the July 14th check, we will only receive a 1-week paycheck to transition us to the new pay cycle; the totals are half the normal savings. The July 28th paycheck is a full 2-week’s worth check on the new pay cycle.

Our Sinking Funds Process

We have a checking account and two linked savings accounts, an ’emergency fund’ savings account and a ‘sinking funds’ savings account.

Every pay day, we transfer the total amount of our sinking funds from our checking account to our ‘sinking funds’ savings account electronically.

We keep track of the individual sinking fund balances in a spreadsheet, ledger style, updated each pay day and anytime we transfer out funds.

Sinking Funds Tracker Spreadsheet

Keep in mind, this is our process. This process can be done in cash, using the cash envelopes system. We know many who withdraw the sinking funds totals every pay period, and divide the money into the respective envelopes/sinking fund categories. The ledger and account balance are handwritten on each envelope.

Do whatever works best for you! Just be sure you are as prepared as you can be for any expenses & bills you have coming up.

Question: What are some of your sinking funds?