Sinking Funds: Saving For Irregular Expenses (A Step-By-Step Guide)

Let me guess why you are reading about sinking funds.

Chances are that you have heard of the term ‘sinking funds’ but you don’t know quite exactly what they are. Or, how they can help you with your financial goals?

Chances also are you already know about sinking funds, but are trying to figure out how to start your sinking funds, what amounts and how to keep track of them.

In either case you are at the right place. This article is intended to be your guide at every step of your sinking funds journey.

jar containing money with text overlay Sinking Funds


So let us start, shall we?

If I were to tell you that sinking funds are a tool that can take your financial journey from panic, overwhelm and more debt to saving your future, what would you say?

Let me explain more.


What is a sinking fund?

If you have saved up a few dollars from every pay check towards a goal, then you have set up a sinking fund.

Yes, it is just that.

A sinking fund is simply putting aside a small amount of money every month for a dedicated purpose before you spend it.

Let us take a simple example. Christmas – a time when one of out two Americans who shop end up with credit card debt, and the associated stress. Not to mention the finance charges and interest for those who can’t pay it off in the first month.

Now instead if these people had planned ahead and put aside a little money each month, they would have a pool of money available to them when holidays come, saving them a whole lot of heartburn.

How does a sinking fund work?

A sinking fund is a way to build up a certain amount of savings so that known big expenses can be made without incurring debt. Every month you will save certain sums of money towards specific designated purpose.

Imagine if you wanted to go for a holiday that will cost you $1200.

Now you could either swipe your credit card, go for your vacation while worrying about the resulting debt, when you will actually pay it off and how much it will end up costing you.


You could put aside a 100 bucks each month for the next 12 months and then dream of those margaritas on the beach as you pack your bags.

Your Emergency Fund

Your emergency fund is also a sinking fund, though a special one.

Think about it- you put aside money every month with an assigned purpose – to use in case of an unforeseen circumstance. Much like your other sinking funds.

However, it is unique. An emergency fund should be the first sinking fund you build up and the last one you use.

Let us say that you unfortunately lose your job. You do have $1000 lying in your sinking funds account that you planned on using for a vacation or for gifts.

Given the change in circumstance, it is safe to assume that vacation may no longer be on the cards. The gifts being planned are going to be downsized. You will be looking at alternatives that don’t cost you money, may be spending quality time with them instead.

As for those dollars lying there, they would go to pay your monthly bills instead.

How are sinking funds different from your savings?

If you save $300 each month from your family’s budget. One year later you have accumulated $3600 in your account.

Meanwhile, your husband starts dreaming of selling his existing clunker and use that money along with your savings to upgrade to a new car.

You on the other hand were thinking of going on a vacation, upgrading the backyard and installing a new heating system in the house.

So, what do you do?

Here is where sinking funds come in. Together you prioritize that $300 per month will be divided into specific amounts for designated purposes.

  • $100 – for a vacation
  • $50 – to upgrade the existing car
  • $50 – for a new heating system
  • $100 – for Christmas and holidays.

At the end of the year both of you can enjoy your vacation and install a new heating system in the house. Your husband may not get his new car, but his clunker can get some major love and care. You postpone your backyard upgrade plans for a worry-free Christmas.

When should you use sinking funds?

Sinking funds are a great tool to plan and budget for any large, irregular expense. Start using them once you are able to pay off your monthly bills (which includes the minimum amounts due on your debt) and your day-to-day expenses.

Start building your emergency fund first.

What amount should you build your emergency fund to before thinking of setting aside money for other purposes?There is no single number fits all answer to this question.

Dave Ramsey says to build a $1000 dollars emergency fund. If you have have a stable income, that amount might be right for you. If you are worried about job stability, then think of a having 3-months of expenses in your emergency fund before you start saving for other purposes.

Categories of Sinking Fund

Sinking funds can be set-up for any large expense. To give you some idea, here is a list of expenses for which you could consider using sinking funds.

Holidays: I put this first because honestly this was the first ever sinking fund that I created. I already had an emergency fund built up at that time. For 2019, I have start saving for Christmas in January and have a dedicated account for it.

Non-monthly bills: Do you see a bump in your monthly expenses when you pay your water-bill once every quarter? You can even that out by saving for it every month. Same goes for other expenses like property taxes.

Annual Subscriptions: Paying for yearly memberships can derail your budget. Things like Sam’s Club, Amazon Prime. How about setting up a sinking fund where you can save a monthly amount and your budget stays on track?

Car repair and maintenance: Cars need work. It could be an oil change, tire rotations or a brand new set of tires. Why not save $20 each month so that you are not caught off guard when the time comes.

House repair, maintenance and upgrade: Much like your car, your home will need some TLC from time to time. Pipes leak, heating systems break down, you may want to build a new deck. So why not plan for these expenses ahead of time and start squirreling away an amount you can afford each month.

Pets: Your pets are expensive. They need grooming, food, treats, and not to mention visits to the vet.

Insurance – life, medical, home: Much like your utilities, these may not come in each month. Putting aside a sum each month will help you smooth over the bump in your monthly budget.

Medical costs: Even if you have insurance all your costs may not be covered. There are deductibles, co-pays or certain medicines which your insurance does not cover. I save roughly $40 each month for my daughter’s prescription medicines which are not covered by our insurance.

Clothes, shoes & accessories: To be honest, I have started a sinking fund in this category to actually start spending money on myself without feeling guilty.

It has been a while since I bought something for myself. And the reason is that I find things that I like to be expensive. So rather than going for months without spending on myself, I have decided to build up a kitty that I will be able to spend on what I like.

Birthdays and celebrations: This would include anything from Valentine’s Day, your kid’s birthday, a milestone, anniversaries.

Travel and vacation: Allow your self some fun, down time. A $100 a month can take you to $1200 in a year’s time. Not too shabby for a family of four.

Kids Activities: Planning on a summer camp for your kid? Or if they need to go in for coaching and activities, to buy gear and equipment. Advance planning and sinking funds are the route to take.

Tuition: You might have to pay for private school, an tutor at home, or even save up for a course you wish to take.

Hobbies and activities: If your play a game, an instrument or like to craft, you know these can be expensive. Rather than finding your self stressing out them, build up a sinking fund.


What can you realistically afford?

This is the first thing to be aware of when you are thinking about sinking funds.

There are a whole bunch of things we want to do, things we want to plan for and save. But can you afford all this expense? How much will sinking funds eat up from your income?

Here is where you go and look at your budget or the plan you have for your money.

Figure out what your monthly bills are. These would be your rent, utility bills, the monthly amounts due on debt, any subscriptions you might have. You have got to pay those. You do not have a choice.

Next think about your variable spending – on your food, personal expenses, household stuff. These are things you have some degree of control on. You can decide how much to spend.

Be realistic, though. Look at your expense tracker for the past few months and then decide.

Now look at your non-monthly bills, annual subscriptions and taxes. These are things you have to pay. You decide if you can pay these off using funds from the month they are due without much stress or would you rather put aside money each month towards these expenses?

Once you have these three figured out and budgeted for, see how much money you have left. This is where you decide how much you want to throw at debt, use for sinking funds or plan for retirement.

This is the important decision you have to make.

How do you decide? You do this according to YOUR FINANCIAL PRIORITIES.

Is it important for you to pay off your debt? or to save for a goal? Maybe you need down payment for your car to get you to your workplace?

You have to decide what amount you want to throw at sinking funds and for what purposes.

These decisions are yours and there are no rules.

The only rule is you do whatever makes you sleep more comfortable at night and tomorrow when you wake up you know you are at a better place than you were yesterday.

When You Can’t Afford to Save For Sinking Funds

If you can’t afford to save for everything festival or celebration, then you have to downsize and prioritize what you want to save for. Maybe all you can afford to start off with is Christmas. Then Christmas it is.

Planning for your sinking funds is really important. Once you know in your heart that your are making the best choice for yourself and your family then then you will be happy to make it work for the things you cannot afford right now.

Find ways to earn extra money. Find things you can sell on ebay, unused clothes on Mercari.

Make something at home for a gift.

If you can’t afford a present, gift them your time. Take them out for a movie.

Find ways to make it work.

How to set up your sinking accounts – saving accounts or Cash Envelopes?

Now that you have a plan for your sinking funds, you need to put that into action. Where do you set up your sinking funds?

A regular savings account works great. Every month you can put in the planned amount into it.

How many savings accounts do you need?

Have two savings accounts – one for your emergency fund and the other for all the balance sinking funds.

Just make sure you have a system to keep track of how much money you assign to each category.

In case you are lucky to have a bank that allows you to open multiple savings accounts ( with minimum balance and other requirements that you can meet), then use custom savings accounts is an option too.

To know more about the benefits and costs of savings accounts and how you can open one, here is a great article you should read next.

If you use cash envelopes for budgeting, you can use them for saving your sinking funds too.

Use a separate envelope for each goal you are saving for. Just like your expense envelopes, stuff these with the required amounts each month. Don’t forget to note down the amounts at the back of your envelope.

Keep your sinking fund envelopes separate from your monthly expenditure envelopes to avoid the temptation of spending them on things they are not meant for.

Track Your Sinking Fund

By now you have figured out how much you want to save in your sinking funds and you have actually started doing so.

The next step is to keep track of how much money you have saved for each of your goals.

Saving different sums of money for a few different purposes can be confusing. Add to this different dates when you start and when you use the money and your head will be spinning out of control.

A good tracking mechanism will prevent overwhelm and help you stay on the top of things.

You could set up one as a spreadsheet, use a free printable, or come up with your own in your bullet-journal.

Lookout for my free printable sinking funds worksheet and visual tracker next week.

Image by stevepb on Pixabay

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