sinking fund

Complete Guide To Sinking Funds And How To Make Them Work For You

One of my favorite tools that I have in my budgeting and saving arsenal is a sinking fund. Have you ever thought about saving for a sinking fund? Oh wait…. not sure what a sinking fund even is.

Sinking funds are key when it comes to staying on top of your budget. They provide a means for saving money and prioritizing your finances. The great thing about sinking funds is that you can create categories based on your needs.

Follow along to learn how to organize your sinking funds to begin saving money now!

Introducing Sinking Funds Into Your Life

Do you dread those months of going to the mailbox to find an unfavorable bill from the car insurance company requesting payment for your policy? How about unexpected purchases such as new tires or a washing machine because yours just bit the dust?

How do you plan for things that will inevitably happen at some point in your life? Do you dip into your emergency fund? Do you use your credit card? Or, are you prepared with a sinking fund?

As we all know lump sum payments can wreak havoc on our budgets if we aren’t prepared. Having a system in place to help you pay these expenses can keep you from falling behind when $h!t hits the fan.

What Is A Sinking Fund?

A sinking fund is a strategic way to save money by setting aside a little bit each month to pay for large expenses when necessary.

Sinking funds are a great way to divide your savings throughout the year so you aren’t hit with a bill that you aren’t able to afford.

Sinking Fund Example

Every 6 months I have to pay my car insurance which is $538. For me, December is the absolute worst time to be hit with a bill like this because of the holidays.  

Therefore, I created a sinking fund where I save $90 a month throughout the year. This makes the large amount due in both June and December much more tolerable on my budget.

It feels good to know that I don’t have to worry about finding cash when June and December rolls around– I simply pull it from the sinking fund!

Did you know that the average American saves only 3.8% of the income they bring home each month? By having a sinking fund it allows you to not only keep your finances healthy but you’ll be prepared when those bothersome bills roll in.

sinking fund

How Does A Sinking Fund Work?

Having different expenses or infrequent bills throughout the year can really mess with your budget if you aren’t prepared. Not having a sinking fund can cause you to scramble to pay these expenses when you least expect it.  

Sinking funds are key to creating a consistent and predictable budget each and every month. They prevent you from stressing to find extra cash and help you to avoid the possibility of falling behind financially or even into debt.

How To Set Up A Sinking Fund?

When setting up your sinking fund the first thing you’ll want to do is decide where you want to keep it. A couple things to keep in mind when deciding where to put your money is to keep it accessible.

Keeping it accessible allows you to easily access it without paying penalties for withdrawals.

The second thing to do for your sinking fund is keep it in a safe, low risk account. A sinking fund is not money you should be hoping to make big money from. You want to keep it safe so the money is there when you need it.

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    Where To Put Your Sinking Fund?

    Depending on your budgeting style there are 3 different options when it comes to where you should put your sinking fund.

    Combined Savings

    Having one combined savings account allows you to keep all your sinking fund money in one easy to find place. If you decide to go this route make sure you have a way to keep track of how much money you assign each category so you have the appropriate amount when needed.

    Individual Savings – Several Small Checking Or Savings Accounts (one for each sinking fund)

    If your bank allows you to open multiple accounts without accruing any fees this is a good option because you can have an account for each sinking fund.

    sinking fund

    Cash Envelope System

    Last but not least you can create a sinking fund within your cash envelope system. Not sure what the cash envelope system is all about? You can read about it here!

    Keep in mind when first starting a sinking fund account you need a good budget to start from. It’s very hard to keep adding money to sinking funds if you haven’t created a budget.

    The best budget for beginners that I always recommend is the zero based budget because of its simplicity and that it accounts for every dollar in your budget.

    **Pro Tip**

    I highly recommend keeping your sinking fund money in a separate account than your everyday money. By having them separate you will know that this money is set aside for a specific fund.

    Putting your sink fund money into your everyday account will just complicate things and make your budgeting more stressful than it needs to be! 😉

    Why Do You Need A Sinking Fund?

    If you are living on a budget where you feel that one large bill could push you over the edge a sinking fund is something you could benefit greatly from.  

    • Having a sinking fund reduces financial stress when large purchases need to be made.
    • Having a sinking fund guarantees that your bills will be paid on time and that you won’t fall behind on payments.  

    The last thing we want to see is someone go into debt to pay a bill they weren’t prepared for. By having a sinking fund you won’t be surprised when a bill arrives because you have the comfort of you know it…. your sinking fund!

    Sinking Fund Categories To Consider Setting Up

    To be prepared its best to take an inventory of your own circumstances and what you need to be saving money for. As we all know there are surprise bi yearly or yearly bills that arrive in our mailbox rain or shine!

    One person may need a vacation sinking fund (hmm my favorite one), someone else may need a home owner association sinking fund, and another person may have a car insurance sinking fund.  The vacation sinking fund sounds much more fun doesn’t it?

    As you can see each person’s story is unique therefore everyone’s sinking funds are going to be different.  Because I can’t tell you exactly what YOU should budget for I’ve created a list of sinking fund categories that are pretty universal to most people

    Car Maintenance

    Owning a car comes with a great expense (tires, scheduled maintenance, oil change, brakes).  If you own a car it means at some point you’ll have to pay for some kind of repair or maintenance.


    Ok, this is the fun sinking fund. To be honest this is my favorite! However, having a travel fund can come in two forms; one for pleasure and one that’s not so pleasurable.

    Let’s start with pleasure. The yearly family vacation to Mexico. The bucket list vacation to Africa- you name it you can save for it.

    On the opposite side of pleasure comes the unfortunate occurrence of funerals or illness.  I know, I just took the fun right out of travel didn’t I?

    However, we never know when a loved one may pass or become terminally ill causing us to travel across the country. By having a travel sinking fund it will assure you you can afford a last minute plane ticket.

    Home Repair/Maintenance

    If you own a home it’s inevitable that something will need to be repaired at some point. It may be something small (which we all hope for) or something large like a brand new roof!

    Home repairs are NEVER cheap. Being prepared with a sinking fund will prove to be your best friend.

    sinking fund

    Medical Expenses

    Illness and accidents happen!  Even if you are lucky enough to not visit the doctor you may need money to pay for prescriptions, vitamins, contacts/glasses, or even a physical therapist.

    Electronics or Technology

    If you’re anything like me you’ve spilled water on your laptop or dropped your phone and cracked the screen.  

    Both of these instances are quite frustrating. But not being able to afford fixing them is even more frustrating. Having the keyboard on my computer inoperable when I had an assignment due almost put me over the edge.

    Optional Sinking Fund Categories- (Various other things you may choose to save for)

    • Gifts
    • Clothing
    • Income Tax
    • School Tuition
    • Car Insurance
    • Pets
    • Kids Activities
    • Holidays
    • House Decorating

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      How Much Money To Put In Each Sinking Fund?

      How much you put into each sinking fund depends on how much each expense costs. I’m a big fan of determining the total cost of bills then dividing them into smaller more manageable amounts.

      1. Determine the amount of money you want saved in each sinking fund.

      If you you want to have $1200 saved for a travel fund then obviously you need to save $1200. If you want to have $2000 stashed away for any car issues then make that a budget goal.

      2. Determine the date you want the money saved by

      For me, I know that my car insurance is due two times a year once in Dec and once in June so in order to afford the $538 every 6 months or 1,076 every year I stash $90 a month into my car insurance sinking fund.

      If you want to take a family vacation in the summer write down the month that you anticipate needing the money by.

      3. Determine the amount of months you have to save until you will need the money

      As mentioned above if you need the money in June and December you will need to make sure that you plan accordingly.

      If it’s currently Dec and you just paid your car insurance you know that you have another 6 months to save up to make your next payment.

      4. Do the math

      Divide the amount of money necessary by the amount of months you have to save. Then you simply begin stashing that amount away into your categorized sinking fund.

      5. Stop saving money in your sinking fund once you have reached the amount needed

      Once you have reached the predetermined amount in each fund you can stop saving.

      Yes. I don’t recommend saving more than necessary in a sinking fund because there are better things to do with your money than “over save” in your sinking fund. A couple good investment options are to either invest your money in a retirement account or put money into a HSA.

      If you’re looking to start saving money these articles may be of interest to you!

      How To Track The Balance Of A Sinking Fund?

      If you have your sinking funds in individual banking accounts the bank will do all of the tracking for you. If you prefer to have a quick and easy method to track all of your money in one place I highly recommend using Personal Capital.

      If you are using the large combined account method where you deposit your sinking fund money into one account you can track it on an excel spreadsheet.

      If you are using the cash envelope system for your sinking fund you can write the balance on the front of each envelope. Here’s a great template for creating your own free envelopes for the cash envelope system.

      Sinking Fund Vs Emergency Fund

      Please don’t get confused between a sinking fund and an emergency fund. They really are different.

      Sinking funds are designated for planned expenses that you’ve budgeted specifically for. An emergency fund is for…. You guessed it emergencies!

      Creating an emergency fund is for unplanned, unexpected events. Not sure how to set up an emergency fund? Don’t miss this guide that walks you through everything you need to know about emergency funds.


      Final Thoughts

      Sinking funds can really change how you manage your money. You can start with just one or two that make the most sense for you. The choice is yours when it comes to sinking funds!

      If you use sinking funds for something that isn’t listed above, let me know in the comments below because I’m always open to good and creative ideas.

      Don’t forget to share and pin for later! While you’re there, I’d love for you to follow me on Pinterest

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