How to Save for Everything: Sinking Funds

I’ve gotten a lot of questions about the best way to budget for larger and irregular expenses. The ones that don’t come up every month but you know are coming. This is a great question because it can seem difficult to figure out how to plan for something that wouldn’t regularly fit into your budget. 

Here are some examples of irregular but expected expenses 

  • Christmas
  • Birthday parties and gifts
  • Car maintenance
  • Car purchases 
  • Some HOA fees
  • Vacations
  • Home improvement projects 
  • Down payments 
  • Life insurance 
  • Furniture

The good news is that the answer is simple. You would use something called a sinking fund to budget for these expenses. 

What is a Sinking Fund

A sinking fund is a fund made by regularly setting aside money over a period of time to save up for an irregular but expected expenses. This might sound an awful lot like a savings account and it should. The only difference is that a sinking fund is like a savings account but with a specific purpose. However, keep in mind that this is different from an emergency fund which is a savings account you create for the unexpected expenses life throws at you. For the record, you need both types of savings but today we are going to focus on how to use sinking funds in your budget. 

Why Should You Use Sinking Funds?

  • The biggest benefit is that a sinking fund helps you avoid taking on debt for large purchases that wouldn’t regularly fit in your budget. If pulling out your credit card for these expenses is a regular occurrence for you, then utilizing sinking funds will be a game changer in your budget. These funds will save you precious money in interest charges you would have incurred by using a credit card. 
  • Sinking funds will save you stress. In my opinion, worrying about how much debt you’re taking on doesn’t feel like the most peaceful start a good vacation or the Christmas season. Imagine Christmas shopping with all the money you need ready for you or shopping for a car with the funds in your bank account? You don’t have to come home from any purchase with payments following you. Sinking funds bring a lot of freedom with them.

How to Make a Sinking Fund

The simplest way to create a sinking fund is to take the estimated amount you will need for the upcoming expense and then divide it by the number of months you have until it needs to be paid. 

Let’s use Christmas as an example:

Next month is September, which would mean we have four budgeting months until Christmas. Let’s say that I have a goal of saving $600 for all things Christmas. That means starting in September’s budget I would set aside $150 in my “Christmas Sinking Fund” category. Then by December, I would have my fully funded sinking fund of $600.

Sinking funds become more manageable the longer in advance we plan for them. Since Christmas is such an expected expenses, imagine if I had a sinking fund starting in January? Instead of four budgeting months, I would have twelve to save that $600. Which means, I would only have to save $50 per month all year. 

A sinking fund helps you spread out the larger and irregular expenses into bite sized pieces that are easier to handle. 

How to Organize Your Sinking Funds

The first question for you to ask is directed to your bank. Before you start using an account for sinking funds, you should see what specific rules or fees your bank has on certain types of savings accounts. 

Questions to ask your bank:

  • Is there a minimum balance for this savings account? If so what is it?
  • What is the fee if my balance goes under this amount?  
  • How many withdrawals are allowed per month on this savings account?Is there a fee if I go over or will you block withdrawals?
  • Is there a monthly fee for having this savings account? How do I avoid fees altogether?  
  • What are the interest benefits to using this savings account that I should know about?

Then, explain to your bank the goal for your sinking funds and see if they have a suggestion on the type of account that would help you avoid all fees since paying fees is 100% unnecessary.

Now that we got those preliminary questions out of the way, here are the options you have for organizing your sinking funds. 

Option 1: Cash 

This is where you take out cash monthly and store it in envelopes somewhere secure in your home. This is the least ideal to me because who wants thousands of dollars laying around their house? If that’s your thing, go for it, but I’m a little too much of worry wart for that. 

Option 2: Use One Savings Account 

This is where you lump all of your sinking funds into one account. This has been our go to recently. Our bank has too many fees for having separate accounts so chose this option. It’s not my favorite because it can be hard at first glance to differentiate the funds from each other, but if you put the amounts in per month and don’t extract from the account unless it’s for one of your stated funds, the money isn’t going anywhere. I believe this is the simplest way to store and organize your sinking funds if you don’t want to worry about fees. 

Option 3: Separate Savings Accounts

This is ideal if you can pull it off where you already bank. Some banks don’t have minimums on savings account balances and no fees for multiple accounts. If you have an account at this type of bank, this is the perfect place to set up different accounts for each category. It’s neat, simple, and utterly satisfying if you’re type A. 


There you have it! How to save for everything using sinking funds. I would love to hear your stories with sinking funds. What do you use them for? How do you organize them? And don’t forget y’all, Christmas is right around the corner. If you plan in advance, you should be able to avoid taking on either more debt or any at all. You’ve got this! 

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