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

Let me tell you why I love sinking funds. They’re the perfect way to save up over time for a large expense. They’re yet another example of how budgets give you permission to spend—and this time to spend big! And they show you just how possible it is to pay cash for anything.

I could honestly keep going, but let’s get to the good stuff: what sinking funds are and how you can use them every single month.

What Is a Sinking Fund? 

A sinking fund is a strategic way to save money for a specific purchase 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. That way, you’re saving up small amounts over a longer time frame instead of having to come up with a big chunk of money all at once.

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.

Every savings goal starts with a budget. Create yours today with EveryDollar.

It all comes down to being intentional. If you’re saving for a new car, next year’s vacation, your anniversary gifts, your kid’s dance camp, 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 fund. Much different. An emergency fund is money you 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 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 it without worry or regret.

• Prepare for those inevitable expenses. When you see those tires are wearing thin, start saving for new ones. If you know the house you just bought has an old roof, start saving for a new one. These aren’t emergencies yet, and if you start saving up now, they never will be!

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 sinking funds are, 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 to save, take the total amount you want to spend 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. That means you’ll 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 with a spreadsheet, 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:

Open up your EveryDollar budget and click “Add Item” under the budget category of your choice. (I picked Savings.)

Then, name that budget item Christmas.

Next, tap the new budget line.

This brings up details. Right by that little piggy bank, tap “Make this a fund.”

There’s a graphic that pops up explaining a bit more about how funds work. Read it all if you want the details, and then tap “Make this a fund.”

Now it’s time to fill in the details. Do you already have money in this fund? List that as your Starting Balance. Then type in whatever amount you’re putting toward the fund this month by Planned This Month. Finally, you need to list the total amount you want in this fund by Savings Goal.

There you go! You’ve got a sinking fund. Make sure you track each time you put money in the fund. EveryDollar keeps up with of how much more you need to save to meet your goal in time.

Note, if you’re on the desktop version of EveryDollar, you’ll go through pretty much the same process, but everything pops up to the side of the screen.

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.

With sinking funds, there actually can be too much of a good thing. Think about it: If you have a million sinking funds going on at once, you won’t see a lot of progress in any of them. There’s only so much money to go around, right?

Here’s what it would look like to split $600 per month among 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. (And a budget . . . which is where EveryDollar fits in perfectly.)

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 making some sinking funds today.