What is a Sinking Fund?
I asked this question at the end of my most recent YouTube video on Anne’s House of Six. I started adding a money-related quiz question at the end of the videos. I had no idea what a sinking fund was myself, well, at least I had never used this term before. Technically, I already have a sinking fund, but I didn’t know that was the name for it.
So, what is a sinking fund? This is a savings strategy where you set aside money regularly for a specific, planned expense in the future. Instead of scrambling to pay a large bill all at once, you “sink” small amounts into a dedicated fund over time. I’ve been doing this for quite some time. Ever since I heard Suze Orman (remember her?) say that you should pay yourself first. When the kids were small, I started a separate account from our savings and sunk a few dollars every month into that account. I never touched that account unless it was needed, and boy, has it come in handy quite a few times!
What is a sinking fund?
Put aside some money regularly for a future expense
How does a sinking fund work?
A sinking fund prepares you for possible future expenses—things that are not monthly, but you know they’re coming. These expenses could be a car repair or maintenance, gifts, vacations, house repairs, back-to-school supplies, insurance premiums, and so on. Suppose you want $600 for Christmas shopping by December. Starting in January, you’d set aside $50 per month in your Christmas sinking fund. By December, you have the full $600 saved, and you don't have to touch your emergency fund or go into debt.
Why are sinking funds helpful
Reduces financial stress. You know you have set aside money to pay for an expense that you know will be coming up like a roof repair.
Helps avoid debt. If you plan, you will have the money set aside when it’s needed.
Encourages intentional spending. The money you set aside in your sinking fund is for an expense that you know you will need and that you are planning for. It’s spending your money with purpose and making conscious choices about where your money goes.
Keeps your emergency fund intact for true emergencies.
Why is a sinking fund helpful
One reason is it can help you to avoid debt
How do you start a sinking fund?
List out irregular expenses you know are coming. For example, perhaps you know that you will need a refrigerator soon or you know that your car oil change and maintenance is coming soon.
Figure out the total amount needed.
Divide by the number of months until you’ll need the money.
Set up separate savings categories (in cash envelopes, bank accounts, or budgeting apps).
I’ve included a SINKING FUND TRACKER just for you. Use it to keep track of what you add to your sinking fund, your goal, and the target date that you want to have that money available. Download the tracker and print as many copies as you need.
Sinking funds are one of the easiest ways to stay ahead of your finances without feeling overwhelmed. By saving a little at a time for expected expenses, you reduce stress, avoid debt, and gain peace of mind knowing you're prepared.
Comment below if you have a sinking fund and what you use it for.