Sinking Funds: What They Are and How to Start One
A sinking fund is money you set aside a little at a time for a specific expense you know is coming. Instead of being surprised by a big bill, you have the cash ready. This guide explains what a sinking fund is, gives sinking fund examples, and shows how to start one.
What is a sinking fund?
A sinking fund is a savings pot with a purpose and a deadline. You divide the cost of an expense by the number of months until it is due, then save that amount each month. Common sinking fund categories include car insurance, holiday gifts, vacations, car maintenance and medical bills.
Sinking fund vs emergency fund
An emergency fund covers true surprises, like a job loss or urgent repair. A sinking fund covers expenses you can predict but that do not happen every month. Keep them separate so a planned expense never drains your safety net.
Sinking fund examples
Here is how a year of irregular costs breaks down:
- Car insurance, $720 a year: $60 a month
- Holiday gifts, $600: $50 a month
- Car maintenance, $480: $40 a month
- Vacation, $1,200: $100 a month
- Medical and dental, $360: $30 a month
Together that is $3,360 a year, or $280 a month. The point is that a $720 insurance bill is much easier to handle as $60 a month.
How to start a sinking fund
- List your irregular expenses. Look back through last year's statements and your calendar for annual and seasonal costs.
- Estimate each cost and due date. Round up to be safe.
- Divide by the months left. Cost divided by months gives your monthly amount.
- Add it to your budget. Use our budget planner to see where the money fits. Sinking funds usually come out of your 20% savings bucket in the 50/30/20 rule.
- Automate it. Set a transfer on payday.
Where to keep your sinking funds
Many banks let you create several savings sub-accounts or "buckets" in one account. If yours does not, keep one savings account and track each category on a printable tracker or spreadsheet. Either way, label each fund clearly.
Tips to make sinking funds work
- Start with the two or three biggest expenses, not everything at once.
- Use the same amount every week challenge to track each fund on paper.
- When a fund is spent, restart it for next year.
- Review once a year, because costs change.
This article is general information, not financial advice.