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What Is a Sinking Fund and How Do You Create One?

Research shows that the average American only saves 3.8% of the income they bring home each month.1 So I bet a lot of people have never experienced the magic of the sinking fund—but they need to! Here’s why:

If a budget offers permission to spend, a sinking fund offers encouragement to spend—and to spend big!

What Is a Sinking Fund? 

A sinking fund is a strategic way to save money by setting aside a little bit each month.

Sinking funds work like this: Every month, you’ll set money aside in one or multiple categories to be used at a later date. With a sinking fund, you save up a small amount each month for a certain block of time before you spend.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

A post shared by Rachel Cruze (@rachelcruze)

Sinking funds work great for things you don’t want to pay for in a single month’s budget, like:

  • New tires for your car
  • Christmas gifts
  • Vet bills
  • Wedding expenses
  • Plane tickets
  • Birthday parties
  • School books and supplies
  • Clothes for a special occasion
  • Vacation
  • Home remodels

You can create a sinking fund for any financial goal, dream or expense you have!

 

Sinking Fund vs. Savings Account

A sinking fund is usually more specific than a savings account since you know exactly how much you’ll put in and when you’ll use it.

money icon

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It all comes down to being intentional. If you’re saving for a new car, next year’s vacation, your anniversary gifts, your son’s braces and your Christmas presents all in the same savings account, chances are, sooner or later, the lines will start to blur. So, instead of lumping everything together in your savings account, be deliberate and specific by having multiple sinking funds.

Sinking Fund vs. Emergency Fund 

A sinking fund is also different from an emergency fundMuch different. An emergency fund is money set aside for the unknown.

With a fully funded emergency fund, you should have 3–6 months of expenses saved for any and all possible emergencies. When your air conditioner burns out and you have to replace it, your emergency fund will step in, and it won’t even feel like an emergency—only an inconvenience. Why? Because it’s the safety net between you and life. You have no way of knowing if these things are coming or when they’ll happen, but you do know that life happens, so you have the money set aside and ready.

With a sinking fund, on the other hand, you know exactly what that money’s for, and you know when you’ll use it.

The sinking fund is for the known. The emergency fund is for the unknown.

Benefits of Sinking Funds 

No matter what your money tendencies are—spender or a saver, nerd or free spirit, experiences or things—everyone can benefit from a sinking fund.

Want to take your family of four to the beach for a week? There goes $1,500. Need a new roof? That’ll be $6,000. Then there are Christmas gifts, or a down payment for your home, or that adult-sized scooter your husband just has to have. (Just my husband? Oh, okay. Cool.)

Spending money can be fun or not fun at all. But at the end of the day, no matter what you’re spending your money on, it all comes from the same place. And every swipe of your debit card can leave you and your bank account feeling defeated.

All of that changes when you add sinking funds to your budgeting routine.

With a sinking fund, you can:

  • Save for anything and everything under the sun. Get as specific as you like to make sure you cover every need and want on your list.
  • Plan for big, extravagant fun. This makes my spender heart so happy. Upgrade your kitchen, take the trip of your dreams, invest in your hobbies, or give generously. Make room for fun by telling your money what to do, month after month.
  • Lose any guilt associated with large purchases. Decide up front (with your spouse, if you have one) what you’re saving for and how much money you’d like to set aside. When it comes time to spend, you can do so without worry or regret.
  • Prepare for those inevitable expenses. We don’t know exactly when, what, or how things will fall apart, but we can pretty much bet they will. Saving over time for unexpected expenses (like new tires for the car and repairs for the house) will make those purchases less stressful.

Saving strategically means fun purchases will actually be fun, and frustrating expenses won’t be a big deal.

How to Create a Sinking Fund

Now that you know what a sinking fund is, how they work, and why they’ll help you, here’s how to create one in four easy steps.

Step 1: Decide what you’re saving up for. 

Let’s pretend you’re starting a sinking fund for Christmas. You want to put a little bit aside over time so the holiday season doesn’t sneak up on you and make you broke.

Step 2: Decide where you’re going to store your sinking fund. 

If you want to open another savings account for a sinking fund, make sure the account doesn’t have a minimum balance to maintain (like a money market). You don’t want monthly fees to chip away at your balance.

If you use our free budgeting tool, EveryDollar, you don’t need a separate savings account at all. EveryDollar will designate that money for you in your budget so you always know exactly how much is in that fund. (More on this in Step 4.)

Step 3: Decide how much you need to save.

To determine how much you save, take the total amount to be spent and divide it by the number of months or weeks you have left until you need to make the purchase.

If you want to spend $1,000 on Christmas and it’s September, you only have about three months to save. Which means you’ll see need a line item in your budget reminding you to stash away about $330 every month until December.

Step 4: Set up your sinking fund in the budget. 

A sinking fund will only work if it’s in the budget.

So, whether you budget in Excel, in an app, or with a pencil and paper, put your sinking fund line item in the budget!

Here’s exactly how to create a sinking fund in my favorite budgeting app, EveryDollar:

On your desktop computer, just click Add Item under the budget category of your choice. (I picked Savings.)

EveryDollar Savings Category

Then, name that budget item Christmas.

Christmas Budget Item

Next, click the dots next to Christmas.

Christmas Savings Fund

This brings up the option to the right for you to turn this budget line into a fund by clicking Make This a Fund.

Christmas Savings Fund

There you go! You’ve got a sinking fund. Now you can enter the balance of how much you’ve already saved, the amount you plan to save each month, and your long-term goal. EveryDollar keeps track of how much you’re saving and how much more you need to save to meet your goal in time. All you need to do is transfer the monthly amount into your savings account.

How Many Sinking Funds Should I Have? 

Now that you’ve seen the beauty of sinking funds, you may want to assign a sinking fund to everything. If you’re out of debt and have your fully funded emergency fund in place, that’s great! But if you’re still in Baby Steps 1–3, those should be your priorities.

The other thing to consider is if you have a million sinking funds going on at once, you won’t see a lot of progress in any of them.

Here’s an example of contributing $600 per month to six different sinking funds:

  • $100 for vacation
  • $300 for a new-to-you car
  • $50 for a backyard makeover
  • $50 for medical expenses
  • $50 for car repairs
  • $50 for home repairs

At the end of one year, your sinking fund totals would be:

  • $1,200 for vacation
  • $3,600 for a new-to-you car
  • $600 for a backyard makeover
  • $600 for medical expenses
  • $600 for car repairs
  • $600 for home repairs

Okay, now imagine you’ve decided it’s time to replace your car. You have two choices: You can look for reliable transportation for $3,600, or you can make $600 in repairs to your current car and continue to save until your car sinking fund grows some more.

But here’s the secret third option: If you skip the backyard makeover and the vacation this year, you’ll already have $5,400 for the car. So, don’t overwhelm yourself with too many sinking fund categories when there’s something you really need.

Don’t Let A Big Purchase Sink You 

See what a difference a little strategic saving can make? The biggest thing you’ll need is patience.

We live in a culture where we buy now. We bring an item home today. Amazon has made anything longer than two-day shipping seem like a crime.

But if you have patience and a plan, you know what you won’t have? Worry. Saving up ahead of time prevents stress, so start your own sinking fund today.

For more information, check out our step-by-step guide to creating a sinking fund in EveryDollar, inside Ramsey+ (complete with visuals!).

Rachel Cruze

About the author

Rachel Cruze

Rachel Cruze is a two-time #1 national bestselling author, financial expert and host of The Rachel Cruze Show. She has appeared on Good Morning America, Today and Live With Kelly & Ryan, among others. Since 2010, Rachel has served at Ramsey Solutions, where she teaches people how to avoid debt, save money, budget and win with money at any stage in life. Learn More.

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