A sinking fund is where you strategically set aside chunks of money each month to pay for non-monthly expenses coming up in the future - like car insurance, Christmas gifts, and vet visits for your cute little fluff.

How many times have you been busy living life and all of a sudden remembered, “Crap! My car insurance is due this month. How could I forget?!” or “Dang it! I totally forgot my cat needs her yearly vet visit this month… There’s no telling how much that’ll cost.”

These expenses are routine and predictable. But because they don’t occur every single month like clockwork, they take you by surprise and throw off your budget. 

This is where sinking funds come in! They help you prepare for these irregular purchases ahead of time, so they don’t “sink” your budget when they pop up.

What are sinking funds?

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A sinking fund is where you strategically set aside chunks of money each month to pay for any non-monthly planned expense that you have coming up in the future.

Instead of feeling stressed and anxious about how you’ll pay for them, you set aside little bits of money now so you can pay them in full later on. This is especially helpful if you plan to make a large purchase and don’t want to cause a hiccup in your monthly budget.

What are examples of sinking funds?

You can create sinking funds for literally any one-off purchases you need (or want) to make throughout the year. Here are 15 examples to get you thinking:

  • Car repairs.
  • Car insurance.
  • Life insurance.
  • Home or renters’ insurance.
  • Home maintenance.
  • New furniture.
  • School supplies for your kids.
  • Annual subscriptions (Amazon Prime, the gym, Squarespace, etc.).
  • Routine doctor’s visits.
  • Vet visits.
  • Birthday and Christmas gifts.
  • New laptop or cell phone.
  • New glasses or contact lenses.
  • Wedding expenses.
  • Vacations.

Do you really need a sinking fund?

Imagine for a moment that you wake up to an email from Geico that says your $650 bi-annual insurance premium is due in a few weeks. Would you…

  1. Panic, reach for your credit card, and worry about the interest payments later? Or…
  2. Say, “No big deal… I’ve got plenty of money in my budget to cover it.” 

If you’re like most people, the answer is A. You’d shout “holy crap!” (or some other expletives), then scramble to figure out how to pay for it. You’d be stressed to the M-A-X, no doubt.

This is exactly why a sinking fund is so important. By setting aside money for it little by little, you won’t be caught off guard when the bill rolls around. You can pay it no sweat and get back to living your life.

How sinking funds can be used as a tool for budgeting

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The truth is, life happens and random expenses are bound to pop up outside of your typical budget. Your best friend may invite you on a beach getaway. You may want the latest iPhone. You may have a tough week at work and say, “Screw it! I’m treating myself to a spa day.”

When these events happen, it’s better to already have the money sitting in your bank account rather than rack up credit card debt or dip into your emergency fund to cover them. (Because let’s face it… these aren’t true “emergencies”).

When deciding which sinking funds you want to add to your budget, consider setting a savings goal to help you pay for these unexpected expenses.

How to set up your sinking funds

Ready to set up your very own sinking fund? Here’s how to do it:

  1. Write out a list of all the sinking fund categories you need.
  2. Guesstimate how much you’ll spend in each category on a yearly basis (it’s okay if you don’t know the exact amount).
  3. Divide that amount by 12 months to figure out how much you need to save each month.
  4. Move that money into those designated categories each time you get paid.

For example, if you know your renter’s insurance costs $244 every January, go ahead and budget $12 a month for it. If you know your car registration costs $100, budget $8.33.

Even if you don’t know how much something will cost – such as a vacation you’re going to take later this year – you can still make an educated guess based on how much you’ve spent on vacations in the past.

When you are ready for your next getaway, you can tap straight into your vacation fund without your budget taking a huge hit.

Sinking funds vs. emergency funds: what’s the difference?

An emergency fund is for true emergencies – you lose your job, you get injured in an accident, your car gets totaled, your roof gets damaged during a windstorm, things like that. Think of it as a fund to cover unexpected expenses and freak accidents you never saw coming. You know, the kind that you can’t plan for in a monthly budget.

Sinking funds, on the other hand, are for irregular expenses you know will happen at some point in the near future.

  • You know your oil needs to be changed every six months.
  • You know that Amazon Prime membership comes due once a year.
  • You are a freelancer who needs to make quarterly tax payments.
  • You know your sister is getting married in Hawaii next year.

These expenses are predictable, and you can get a jumpstart on saving for them using sinking funds.

Read more: Emergency Funds: Everything You Need To Know

Where to keep sinking funds

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Ideally, you want to keep your sinking fund in a free checking account or a high-yield savings account where you can access it at a moment’s notice – whenever a non-monthly expense pops up.

Read more: Best High Yield Savings Accounts Compared

Some people like to set up separate checking or savings accounts for each sinking fund category. If this works for you, then by all means, get to opening those accounts! But if you’re like me and the mere thought of having 10+ bank accounts stresses you out, then let me tell you what I do.

I personally keep all my sinking funds in an online savings account, then use YNAB (my all-time favorite budgeting app) to separate it all out. I have sinking fund categories in YNAB for each and every non-monthly expense I need to save for – renters’ insurance, car insurance, vet visits, medical expenses, vacations, and even hiking/camping gear (because I really love the outdoors).

But there are tons of budgeting apps that can track all of your different sinking funds accounts. We offer a few suggestions in our article: Best Budgeting Apps To Take Control Of Your Finances

Summary

Sinking funds prevent you from “sinking” further into debt when non-monthly expenses float your way.

Instead of being surprised when an expense pops up, you’ll have the money you need to cover it sitting right there in your bank account. No stress, no drama. Just sweet dollar bills ready to keep you chugging along with your personal finance goals.

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About the author

Cassidy Horton
Total Articles: 45
Cassidy Horton is a finance writer who specializes in banking and insurance. She earned her MBA and bachelor’s degree in public relations from Georgia Southern University — and has since published hundreds of finance articles online for Forbes Advisor, The Balance, Money, Finder.com, and more. When she's not helping Millennials and Gen Zers gain control of their finances, you can find Cassidy hiking around the Pacific Northwest, cuddling her two cats, and eating way too much fried chicken. Connect with her on cassidyhorton.com or LinkedIn to see what she’s up to next.