What is a Sinking Fund?

To put it in the simplest of terms, a sinking fund is money set aside, little by little, for a known, upcoming expense.

Examples of sinking funds can be:

• Car maintenance and repairs
• Holiday or Gift Shopping
• School Supplies
• Clothes
• Annual subscriptions

A sinking fund is different from an emergency fund because it is for planned expenses, where an emergency fund is used to cover surprise expenses.

Remember:

Sinking fund = predictable – like a car registration renewal

Emergency fund = surprise curveballs – like an unexpected medical bill

Why You Absolutely Need a Sinking Fund

Have you ever done any of the following?

• Put an expense on your credit card because you didn’t plan for it?
• Paused your savings goals to cover an expected but poorly timed bill?
• Felt anxious every time an annual expense or big bill hits?

…then sinking funds will be a game changer for you!

Sinking funds can help you prevent blowing your monthly budget, stop relying on your credit cards or loans, and save gradually rather than panicking last minute.

Most importantly, sinking funds will allow you to feel in control of your money.

I’ll be honest, I didn’t always have a sinking fund. A few months back, my car registration and inspection came due. Upon that inspection I was hit with a $600 car repair bill and it completely wrecked my budget for the month. I ended up having to take a personal loan to cover the expense and it took months to pay off.

That’s when I knew I needed a better plan. Now, I set aside a little bit out of each paycheck to help me cover car maintenance, holidays and other predictable expenses. It has made such a difference. No more panic and overall, less debt!

How to Set Up a Sinking Fund

Before you can set up a sinking fund or start contributing to one, you need to do a couple of things first.

1. List the annual or planned (irregular) expenses that come up throughout the year.

Think about the things that come up once or twice a year. Don’t forget things like the kids’ birthdays, the holidays, car maintenance and insurance payments.

2. Calculate How Much You Need to Have Set Aside

Now put a number to those different expenses. How much do you need to cover that expense when it is due?

3. Divide the Total by Months (or Paychecks)

For example, it is currently July and the holidays are just a few months away. You have decided that to have a comfortable holiday (without going into debt) you’ll need $1200. You have 6 months to pull that money together.

So, you need to set aside $200 per month to cover this expense.

4. Create a Dedicated Space for the Sinking Fund

You can do this in a number of ways.

You can:

• Open a separate savings account for each sinking fund (or all of them together if you prefer)
  • Bonus tip: Put the money in a savings account gives you a higher interest rate and can help put additional money toward your sinking funds!
• Use cash envelopes if you prefer a physical method
• Track your funds in your daily checking account with a budgeting app or printable tracker