A sinking fund is money you set aside a little at a time for a specific cost you know is coming, such as car repairs, holiday gifts, a vacation or a yearly insurance bill. Instead of a $1,200 bill landing all at once, you save $100 a month for a year and pay it without stress or debt.
How a sinking fund works
- Name the expense and estimate its cost.
- Count the months until you need the money.
- Divide the cost by the months. That is your monthly amount.
- Automate a transfer for that amount each payday.
- Spend it only on that purpose, then start again.
Examples
| Goal | Cost | Months | Save per month |
|---|---|---|---|
| Holiday gifts | $600 | 12 | $50 |
| Car insurance (yearly) | $1,200 | 12 | $100 |
| Summer vacation | $2,400 | 8 | $300 |
| Car repairs and tires | $900 | 12 | $75 |
| New laptop | $1,000 | 10 | $100 |
Sinking fund vs emergency fund
A sinking fund is for costs you can predict. An emergency fund is for things you cannot, like losing your job or a medical bill. If you raid your emergency fund every December, you need a holiday sinking fund.
Common sinking fund categories
- Car maintenance, registration and insurance
- Home repairs and property tax
- Gifts, holidays and birthdays
- Vacations
- Medical, dental and vet bills
- School costs and kids’ activities
- Annual subscriptions and memberships
- Replacing a phone, laptop or appliance
Where to keep sinking funds
A high-yield savings account works well. Many online banks let you create separate “buckets” or sub-accounts with their own names, so each goal has its own balance. If yours does not, one account plus a simple spreadsheet does the same job.
Tips
- Start with the two or three bills that hurt most each year.
- Look at last year’s statements to find irregular costs you forgot.
- Round up your monthly amounts to leave a little slack.
- Add sinking funds as lines in your budget.
- Live prices and sentiment on every ticker page
- Weekly email with your watchlist movers
- Price alerts on the stocks and coins you follow
Frequently asked questions
How many sinking funds should I have?
Most people do well with three to eight. Too many becomes hard to manage.
Should I build sinking funds while in debt?
Small ones for unavoidable bills, yes. They stop you adding new debt while you pay off the old.
Why is it called a sinking fund?
The term comes from business and government finance, where money is set aside over time to “sink”, or pay off, a future debt.
This article is general information, not financial or tax advice.
Leave a Reply