Sinking Funds | What is a Sinking Fund and Why Do I Need Them

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Do you know what a sinking fund is? If so, do you have a sinking fund? If not, you definitely should! Here’s everything you need to get started.

A sinking fund and an emergency fund work similarly but are used for very different purposes. If you have been using your Emergency Fund for unexpected expenses, that are not true emergencies– you may be shortchanging yourself! (Badumpsh! See what I did there?! Pun intended!!)

What is a Sinking Fund? 

Sinking funds are a pot of money (or several pots of money), that you regularly contribute to, for expenses that aren’t regularly occurring or that you know are coming and need to be set aside.

The main difference between Emergency Funds and Sinking Funds:

Emergency Fund: for expenses you don’t know are coming and have to be addressed immediately. Like losing your job– that calls for dipping into your emergency fund.  

Sinking Fund: for expenses you know are coming, but don’t always know when they are coming OR they are not regularly occurring. There are tons of examples of below, but paying for ballet lessons or new tires on your car. Both are great examples of when you would use sinking funds.

While having a regular budget is an absolute necessity when telling your money where to go, they really only cover expenses that occur regularly.

So what happens to annual dues, HOA fees, vacations, tires for your car?

Those are what sinking funds are for and yes, you absolutely should start setting them up ASAP!

How Can Sinking Funds Keep You Out of Debt?

For most people, when something unexpected pops up they are quick to whip out their credit card. 

If you are whipping out your credit card to pay for your daughter’s field trip, chances are it’s gonna take you a minute to pay that back. Which means you will be paying interest on that $100. 

Don’t do that to yourself. Plan ahead. Get ahead of what has the potential to turn into a stressful situation. 

Yes, credit cards could band-aid the problem, but it’s gonna cost you.

How Do I Set Up Sinking Funds?

First, I’d recommend you sit down and make a list of what you have upcoming that you need to set aside money for as well as things you think have the potential to come up and write down the due dates (guesstimate if you have to).

Second, where are you going to save the money? Under your mattress? In a jar? In a traditional savings account? A high yield savings account?

Capital One 360 and Ally both have great high yield savings accounts that would be good options. This isn’t a sponsored post or an affiliate, but I’ve had a positive experience with both banks.

There are tons of other online banking options though.

One of my favorite features is that you can automate your savings. You can literally set it and forget it. 

Another perk is that it’s accessible without being too accessible, making it harder for you to dip in for money when you shouldn’t, but not when you need it.

Where Does the Money for Sinking Funds Come From?

First, check your budget and see what you can start putting aside for your sinking funds. Even if it’s only a few dollars here and there at first, something is most definitely better than nothing. 

The point of these funds is to look ahead at bills you KNOW are coming due. So ready or not, you are going to have to pay for it. Give yourself the peace of mind to have the money ready or a plan in place to get ready for these upcoming expenses.

The second part of funding these accounts is deciding what gets paid first. 

Based on the list you made previously of what you need to prepare for, I would start with the most immediate needs first. 

Is your annual home winterization about to come due? Is it time to enroll your child in Fall Ball? What about Property Taxes?

Whatever you are setting money aside for, prioritize where the money needs to go first. Once you have those accounts fully funded, move on to the next need.

How Much Do I Deposit in Each Fund?

Let’s say you owe $2000 in property taxes in 6 months. You divide your $2000 bill by 6 months, which is roughly $334/month. So, yeah a $334 is a lot to have to put away, BUT it’s better than having to come up with $2000 all at once. Plus, the good news is, once you start using sinking funds, you can get ahead for the next year. $2000 divided by 12 months is about $167. A much more manageable amount of money!

What Happens if You Don’t Have Enough to Fund Everything?

Let’s say you go line by line through your list and due dates and have the monthly totals you need to be saving.

Trouble is you don’t have enough money yet to fully fund everything. What do you do?

Start with the most important and work your way down.

Once you get one category fully funded, roll that money over into something else until you have everything covered.

If you are in the early stages and something crops up sooner than expected one option would be to borrow from other funds. 

Another possibility to consider is picking up a side hustle! There are tons of ways you can earn a few extra bucks:

  • Selling unused stuff either with garage sales or Facebook Marketplace.
  • Sign up for surveys to make a little extra cash or earn gift cards. One of my favorites is Swagbucks, but there are lots of good options. 
  • Babysitting
  • ThredUp.Think of ThredUp as an online consignment shop. The reason I am in love with this website is that, not only am I getting a great deal on gently used, or never worn items are available for great prices, but they also will accept your clothes. They will send you what they call their “Clean Out bag”. It gets processed (they go through everything) and then they’ll send you an email with your earnings. The first 14 days, you can use your credit to purchase items from the After 14 days, you can cash out using PayPal or a thredUP Visa Prepaid Card. I’m kind of obsessed with this website. Bonus! If you sign up through my link above you get a  $10 credit.

How Can I Track My Sinking Funds?

You have two real options when it comes to tracking your sinking funds.

Option A: One lump account. I have one lump account that I contribute to and then track what funds I’m depositing into and the amount in my budgeting spreadsheet.

Option B: Individual accounts. You can set up individual accounts (a la Capital One 360) with their own names and their own accounts. 

sinking fund

Sinking Fund Checklist

In case you need some help coming up with potential sinking funds, here’s a list of different types of sinking funds you might make:

You know best what you have going on in your life. You can set up Sinking Funds for just about anything. 

Think back over the last year and where things cropped up and forced you to overspend in your Budget.

Common Sinking Fund Examples and Ideas

I made the graphic above so it’s Pinnable if you do Pinterest, but I want to talk a little about some practical common places a sinking fund will make sense.

  • Auto Expenses: Because maintenance is a must to keep it running and there’s a good chance at some point something will break. 
  • Holidays: Everyone has birthdays, Christmas, Thanksgiving, Spring Break, etc. Holidays have a way of sucking up extra money. Transportation, food, gifts, etc. Setting aside money just eases that burden for you.
  • Down Payment: Whether it’s for a house or a car, a down payment is a pretty common expense these days.
  • Vacations: Want to visit Hawaii? Europe? Go on a cruise? Start planning ahead and cash flow it. Budgeting doesn’t have to mean depriving yourself so much as planning ahead and telling your money where to go.
  • Medical: Even with superior insurance, chances are you’ve got co-pays, prescriptions, or services/procedures that aren’t covered. 
  • Educational Expenses:  After school activities, books, continuing education, etc.
  • Pets: Medications, annual appointments or for potential pet emergencies
  • Homeowner Association Fees

Some Maybe Not So Common Sinking Funds

  • Back-to-School shopping (because let’s be honest, it’s getting crazy expensive to cash flow a few hundred dollars in school supplies– Lawd!)
  • Coloring your hair-– because you just can’t with your grey roots.
  • New Winter Coat and Boots
  • You want to run your first 5K and need to cover registration. 

Whatever it is, no matter how strange or random–write it down and start planning for it today. 

The Take-Away

Sinking Funds serve a strong purpose as a part of your overall budget. They can help keep you from racking up additional debt. They can ease the burden of the irregular and unexpected expenses, but you have to do your part by being prepared and regularly contributing to them, even if it’s just a few dollars here and there.  

If you are looking for ways to find extra money to start building your sinking funds fast, I’ve got a fantastic round-up of some great, easy side hustle ideas, which I talked about in my post about how to build an Emergency Fund.

I hope you’ve found some part of this helpful. Please comment below with your own sinking fund ideas, I’d love to hear them!


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2 thoughts on “Sinking Funds | What is a Sinking Fund and Why Do I Need Them”

  1. Thank you for the AWESOME article!! I really had no idea about Sinking Funds other than the definition and now I feel ready to tackle that part of my budget. Before now I’ve just been “borrowing” the money from the monthly budget when something comes up, until I had extensive auto maintenance $4,000! Needless to say this left me scrambling in all directions!!

    • Hi!

      Thank you so much for the kind words. I’m happy to hear you found it helpful.

      Yes, sinking funds are such a solid way to help keep your budget on track. Depending on monthly expenses, some families are able to borrow to make up for the unexpected expenses, but as you mentioned, it only takes one big financial incident to really show you where sinking funds can help. I think you’ll find you stress less once you get these sinking funds set up and funded.



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