Skip to content
  • AboutExpand
    • Contact
    • Press
    • The Women Who Money Team
    • Sponsor WwM
  • Estate Planning 101 Book
  • ArticlesExpand
    • 100-Level (Novice)
    • 200-Level (Intermediate)
    • 300-Level (Advanced)
    • Reviews – Books, Apps, Tech, ProductsExpand
      • Book Reviews
    • Inspiring Money Interviews
    • Reader’s Stories
Women Who Money Logo
  • Glossary
  • Recommended
  • DirectoriesExpand
    • Personal Finance Blogs by Women
    • Personal Finance Professionals
    • Female Hosted/Co-Hosted Personal Finance Podcasts
  • Start HereExpand
    • Ready to Learn More About Managing Your Money? Start Here
    • Have Important Questions About Your Career? Start Here
    • Have Questions About Your Kids and Money? Start Here
    • Questions On Housing – Buy, Rent, Sell, Move? Start Here
    • Ready to Learn About Investing In Real Estate? Start Here
    • Have Questions About Estate Planning? Start Here
  • EarningExpand
    • Career
  • Investing
  • Saving
  • PlanningExpand
    • College
    • Estate Planning
    • Health Care
    • Insurance
    • Retirement Planning
  • Credit & Debt
  • Everyday $Expand
    • Charity
    • Housing
    • Travel
  • Relationships & MoneyExpand
    • Marriage and Money
    • Kids & Money
  • Entrepreneurship
Women Who Money Logo
Home / Everyday Money / What are Sinking Funds and are They Smart to Have?

What are Sinking Funds and are They Smart to Have?

100-Level (Novice) | Everyday Money
UpdatedOctober 30, 2021

(This page may contain affiliate links and we may earn fees from qualifying purchases at no additional cost to you. See our Disclosure for more info.)

 

It can be overwhelming to learn how to manage your money and build a financially secure future.

Paying down debt, budgeting, tracking expenses, saving an emergency fund, and opening investment accounts take patience and focus.

You’ve made good progress some months, but sticking to a budget and saving money has been hard. Bills and expenses always seem to come up and throw you off track.

It seems like you have to dip into your emergency fund for things that aren’t emergencies too.

You don’t have a budget line for maintaining or repairing your car, a weekend getaway for your anniversary, an overnight summer camp for the kids, and gifts for the holidays.

three glass jars to save money in sinking fund accounts

Yet you know you’ll spend money on things like this each year.

This is why it’s a smart idea to add sinking funds to both your vocabulary and your budget.

Sinking funds help prevent you from busting your monthly budget. Or taking on more debt for expected – but not regular monthly expenses.

And if you think sinking funds are just for people who are starting to build their financial house, think again.

Unless money is no concern at all, making the shift from frantic spender to prepared saver can improve your financial health and reduce your stress.

What is a Sinking Fund?

You may have set up a monthly budget after tracking your expenses for a few months. While that's a great first step in taking control of your finances, it isn’t surprising you’d come up short some months.

We tend to keep monthly budgets consistent, even though spending can vary greatly. The use of sinking funds can help preserve stable monthly budgets.

A sinking fund is used for short-term savings goals for expenses you expect to have but are not a part of your regular monthly spending.

You plan and save money in small amounts over some time for a specific purpose.

Sinking funds are a useful strategy to help keep you out of debt. You’ll use these funds, rather than putting expenses on a credit card or using money from your emergency fund.

Let’s take holiday spending as an example. If you plan to spend $600 on gifts this holiday season, you’ll put $50 a month into your holiday gift fund.

When it’s time to shop, you can withdraw this money and use the cash to make purchases, or you can pay your credit card bill with this fund.

Your parents or grandparents might call this a “Christmas Club” account.

While it’s easier to customize savings accounts and set up several at one bank now, these accounts are still popular with some people – especially those who use credit unions.

If you get a “save the date” card for your cousin’s out-of-state wedding, create a sinking fund.

Determine how much you think you’ll spend and divide the amount by the number of months or weeks left before the wedding.

If you think it will cost around $1000 and their big day is five months away, direct $200 per month into a “wedding trip” sinking fund.

How Are Sinking Funds Different Than Emergency Funds?

overhead shot of a female working in a financial spreadsheet on her laptop

Sinking funds will help prevent you from using money in your emergency fund for expenses you should have been able to anticipate.

At some point, your house will need repairs and so will your car. You’ll visit the dentist, get new glasses, and you’ll take your pet to the vet for shots.

Yet, you might not have a budget line for these expenses because they aren’t a part of your regular monthly spending.

Rather than using money from your emergency fund to cover bills you know you’ll have at some point in the year, set up a sinking fund to pay them.

Try to keep your emergency fund for emergencies – severe illness or injury, the loss of a job, or a flooded home. These are unexpected expenses.

While it might be tempting to use money in your emergency fund for other things you consider essential, don’t risk going into serious debt for things you could have planned for.

You plan to spend sinking funds. You hope you’ll never have to spend emergency funds.

Categories of Sinking Funds

Renting a beach house for a week in the summer? Saving a downpayment for a home?

Paying insurance or tax payments annually or semi-annually, rather than by the month?

You can create sinking funds for all of those expenses and more.

Sinking funds are another excellent example of why it’s called “personal” finance. The funds are aligned to meet your needs and lifestyle.

Here are some examples of sinking funds:

  • Preparing for a new baby
  • Maintenance or Repairs (car, home)
  • Car replacement
  • Pets
  • Gifts (birthday, anniversary)
  • Holidays
  • Home upgrades/remodeling
  • Medical bills – dental or vision care
  • Clothing
  • Charitable giving
  • House downpayment
  • Insurance premiums
  • Travel/Vacation
  • Kids sports and activities
  • Taxes
  • Utilities (quarterly, annual)
  • Membership renewal
  • Fees, licenses, subscriptions, dues

Where To Keep Sinking Funds

Once you decide which sinking funds you need, how much to save each month, and adjust your budget – you’ll need to choose where to keep the money.

multiple piggy banks to hold sinking funds savings

Using cash envelopes, multiple jars or piggy banks are an option for smaller funds.

But if you think you might be tempted to spend cash (or if you’re afraid it could get lost or stolen) – it’s a better idea to use savings accounts.

Your neighborhood bank or credit union may allow you to set up multiple accounts and name each one separately. Just be sure you won’t have to pay fees to maintain the accounts.

Using high-interest online savings accounts such as those offered by Capital One or CIT bank is a way to make money on your money – even if you only save for a few months.

It may be a little extra work, in the beginning, to set up your sinking fund accounts. But if you automate deposits – you’re well on your way to reducing stress!

You can easily track these funds using a sheet of paper, spreadsheet, or with financial apps like Mint, Tiller, and Personal Capital.

You’ll be prepared for those expenses you know are coming but you failed to budget for adequately in the past.

Safeguard Your Budget With Sinking Funds

While compound interest, net worth, and target-date retirement funds are important financial terms to learn about and understand, sinking funds will help you manage your money so you can invest in your future.

  • What Should You Know as a Beginning Investor?
  • Why Is Taking Some Financial Risk Important?

And that goes for those of you just starting to get your finances in order, to those looking to improve upon how you currently budget your money.

Shifting from reactive spender to proactive saver will improve your financial house and lessen your financial stress.

Vicki Cook and Amy Blacklock

Written by Women Who Money Cofounders Vicki Cook and Amy Blacklock.

Amy and Vicki are the coauthors of Estate Planning 101, From Avoiding Probate and Assessing Assets to Establishing Directives and Understanding Taxes, Your Essential Primer to Estate Planning, from Adams Media.

empower adempower ad
Women Who Money

Amy Blacklock and Vicki Cook co-founded Women Who Money in March 2018 to provide helpful information on personal finance, career, and entrepreneurial topics so you can confidently manage your money, grow your net worth, improve your overall financial health, and eventually achieve financial independence.

Facebook Twitter Instagram Linkedin
Hello & Welcome to WwM!

We're here to help you learn more about managing your money, so you can reach your financial goals.

Let's improve your financial health, grow your net worth, and achieve financial independence!

Check Out Our Latest

  • Items to Stop Buying to Save Money and Curb Clutter
  • Everyone says that I should pay off my mortgage before I retire. What if I can’t?
  • Is Landscaping a Good Investment? [+ improving curb appeal on a budget]
  • Our Estate Planning Experience [Why we set up a trust]
  • How to Put Together a Benefits Package When You’re Self-Employed

Grab Our Book Estate Planning 101 and Learn How to Protect Yourself, Your Loved Ones, and Your Finances

estate-planning-101-book-cover


CIT Bank ad graphic

Women Who Money is a personal finance site dedicated to providing trustworthy financial information.

Our all-female team of money bloggers, authors, and professionals, will help you find answers to all your financial questions and guide you along on your journey to financial independence.

More About WwM

The Women Who Money Team

Our Book Estate Planning 101

Press/Media

Contact Us

Facebook Twitter Instagram Linkedin Medium
  • Home
  • Start Here
  • Credit & Debt
  • Earn Money
  • Save Money
  • Invest Money
  • Everyday Money
  • Charity
  • Planning
  • Relationships & Money
  • Money In Business
  • Reviews
  • Interviews

Pages and articles on this site may contain affiliate links. Please read our Terms & Conditions for more information.

Terms & Conditions

Privacy Policy

We participate in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for us to earn fees, at no additional cost to you, by linking to Amazon.com and affiliated sites.

Copyright © 2018-2024, All Rights Reserved, Women Who Money -  Built with Kadence WP

  • About
  • Our Book
  • Start Here
  • Glossary
  • Trusted Resources
  • Directories
  • Articles
    • Earn
    • Career
    • Saving
    • Invest
    • Credit & Debt
    • Everyday Money
    • Housing
    • Money & Relationships
    • Estate Planning
    • Health Care
    • Insurance
    • Retirement Planning
    • Travel
    • Money & Business
    • Interviews
    • Reviews
Search