Sinking Funds: What They Are and Which Categories to Start With
The short answer
A sinking fund is money you set aside a little at a time for a cost you know is coming, like car insurance, holiday gifts or school supplies. Divide the cost by the months you have left, save that amount each month, and keep it separate so you don’t spend it by accident. Saving automatically and checking your progress makes it easier to keep going. [1]
Sinking fund vs. emergency fund
An emergency fund is for unplanned expenses, like a car repair or a medical bill. [1] A sinking fund is for costs you can plan for. You know they’re coming, even if they don’t arrive every month.
Having both helps. A sinking fund keeps predictable costs from eating into your emergency savings.
Common sinking fund categories
Start with the bills and expenses that come up once or twice a year. Look back at last year’s bank statements to find them.
Home and car
- Car insurance, if you pay every six months or yearly
- Car registration and maintenance
- Renter’s or homeowner’s insurance
- Home repairs and appliance replacement
Family and kids
- Back-to-school clothes and supplies
- Kids’ activities, camps and sports fees
- Birthdays
Seasonal
- Holidays and gifts
- Travel and visiting family
- Higher heating or cooling bills
Personal
- Annual memberships and subscriptions
- Medical, dental or vision costs you expect, such as copays
- Clothes and shoes
- Pet care
You don’t need all of these. Pick the two or three that have caught you off guard before.
How to set one up
- Name the goal. A specific goal helps you stay motivated. [1] “Car insurance renewal, paid in full by June” works better than “car stuff.”
- Do the math. Divide the amount by the number of months until it’s due. That’s your monthly savings target.
- Add it to your budget. You can list savings as one of your monthly expenses. [3] See our guide on how to make a budget and stick to it.
- Pick a consistent amount. Aim for a specific amount each payday or month. If you can sometimes add more, you’ll reach the goal faster. [1]
Where to keep it
Keep the money somewhere safe that you won’t be tempted to spend. [1] The CFPB lists options for emergency savings that also work here: [1]
- A separate bank or credit union account. Banks and credit unions are generally considered one of the safest places for your money.
- Cash at home. It’s easy to reach, but cash can be lost, stolen or destroyed.
Some people keep one savings account and track each fund on paper. Others open separate accounts. Either can work. Check with your bank about fees before opening new accounts.
Make it automatic
Setting up a recurring transfer from checking to savings is one of the easiest ways to save consistently. [1] Keep an eye on your balance so the transfer doesn’t cause an overdraft fee. [1]
Getting a tax refund or a cash gift? Putting some of it into a fund can give you a quick head start. [1]
Track your progress
Checking your savings regularly, whether through a balance alert or a running total on paper, can keep you encouraged. [1] When you hit a goal, celebrate it, then set the next one. [1]
The Budget Tracker printable is one way to keep your totals on paper. For more money basics, visit the Budget Hive.
Make it easier
Want it on paper? Use the Budget Tracker to keep track as you go.
Not financial advice.
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