Sinking Funds Explained

A sinking fund is money you set aside gradually for a planned future expense. Unlike an emergency fund (for unexpected events), sinking funds are for expenses you know are coming.

Why Sinking Funds Matter

The Problem They Solve

Many people experience a cycle:

1. Annual bill arrives (car insurance, property tax, etc.)
2. No money saved for it
3. Put it on credit card or raid emergency fund
4. Pay interest or feel behind
5. Repeat next year

Sinking funds break this cycle.

Expected “Unexpected” Expenses

These expenses surprise people but shouldn’t:

• Car maintenance and repairs
• Holiday gifts
• Annual insurance premiums
• Medical copays and deductibles
• Home repairs
• Pet vet bills
• Back-to-school costs
• Vacation
• Wedding gifts

If it happens regularly, it’s not an emergency — it’s a sinking fund category.

How Sinking Funds Work

The Basic Formula

Annual/Periodic Cost ÷ Months Until Needed = Monthly Savings

Example: Car Insurance

• Annual premium: $1,200
• Months to save: 12
• Monthly contribution: $100

When the bill arrives, you have $1,200 waiting.

Sinking Fund vs. Emergency Fund

Common Sinking Fund Categories

Transportation

Home

Holidays and Gifts

Medical

Personal

Children (if applicable)

Pets

Setting Up Your Sinking Funds

Step 1: List Your Known Expenses

Review the past year:

• Bank statements
• Credit card statements
• Calendar (for recurring events)

Write down every non-monthly expense.

Step 2: Calculate Amounts

For each expense:

1. What did you spend last year?
2. Add 10% buffer for inflation/increases
3. Divide by 12 for monthly savings

Step 3: Choose Your Structure

Option A: Multiple Accounts

• Open separate savings accounts for each category
• Some banks (Ally, Capital One) allow unlimited sub-accounts
• Very clear and organized

├── Emergency Fund: $10,000
├── Car Sinking Fund: $1,200
├── Holiday Fund: $800
├── Vacation Fund: $2,000
├── Home Maintenance Fund: $1,500
└── Medical Fund: $500

Option B: Single Account with Tracking

• One savings account for all sinking funds
• Track categories in spreadsheet or app
• Less fragmented, but requires tracking

Sinking Fund Account: $6,000
├── Car: $1,200 (tracked)
├── Holiday: $800 (tracked)
├── Vacation: $2,000 (tracked)
├── Home: $1,500 (tracked)
└── Medical: $500 (tracked)

Option C: Budgeting App Categories

• Use YNAB, EveryDollar, or similar
• Virtual “envelopes” for each category
• All money in one account, tracked by software

Step 4: Automate Contributions

Set up automatic transfers for each fund:

• Timing: Day after payday
• Amount: Calculated monthly contribution
• Destination: Specific sinking fund account/category

Sinking Fund Strategy Examples

Example 1: Single Person, Renter

Example 2: Family, Homeowner

Example 3: Minimal Approach (Starting Out)

Using Your Sinking Funds

When to Withdraw

• Right timing: When the expense arrives
• Full amount: Use what you’ve saved for that purpose
• Don’t feel guilty: This is exactly what the money is for!

Handling Overages

If you spend more than saved:

1. Cover the difference from checking
2. Consider adjusting your monthly contribution
3. Don’t raid emergency fund for predictable expenses

Handling Surpluses

If you don’t spend the full amount:

• Roll it forward (car fund builds up for bigger repairs)
• Transfer excess to another goal
• Enjoy having a buffer!

Common Questions

“Isn’t this just budgeting?”

Yes, but with a specific structure:

• Regular budgeting: “I should save for Christmas”
• Sinking funds: “$42 automatically moves to Christmas fund every month”

The automation and separation make the difference.

“How many funds should I have?”

Start with 3-5 major categories:

• Transportation
• Holidays/gifts
• Medical
• Home (if applicable)
• Vacation (if desired)

Add more as you get comfortable.

“What if I can’t afford all these funds?”

Prioritize:

1. Must-pay (property tax, insurance)
2. Likely needs (car maintenance, medical)
3. Nice-to-have (vacation, gifts)

Even $20/month toward each fund helps.

“Should I invest sinking funds?”

Generally no.

• Time horizon is usually short (1-12 months)
• You need the money on a specific date
• Market volatility could mean less than you need
• Keep in high-yield savings accounts

Key Takeaways

• Sinking funds are for expected, irregular expenses
• They prevent credit card debt and emergency fund raids
• Calculate annual costs and divide by 12 for monthly savings
• Separate accounts or tracked categories both work
• Automate contributions like any other bill
• Use them guilt-free — that’s what they’re for!

Next: Emergency Funds for Different Life Stages — How your safety net needs change over time.