What is a Sinking Fund and How Does it Work? Easy Steps!

Saving money can feel overwhelming. There are bills, groceries, and all those unexpected expenses that seem to pop up at the worst times. So, if you are wondering, “What is a sinking fund and how does it work?”, I’ve got some easy steps for you today!

I’ve been there. It’s frustrating to feel like you’re always playing catch-up. That’s where a sinking fund comes in. It’s a simple, tried-and-true way to set aside money for big purchases and avoid debt. 

If you’ve ever found yourself scrambling to pay for Christmas gifts, car repairs, or a last-minute plane ticket, a sinking fund can change the game. I know, Christmas comes around at the same time every year, but we still find ourselves scrambling. It’s not like, Hey!! Surprise, it’s Christmas time.

A sinking fund can change the way you handle money and it’s easier than you think. 

Let’s break it down into small, actionable steps so you can start today.

The goal is to start today! Here are some steps that you can read through and start applying today! Let’s go!

What Is a Sinking Fund?

A sinking fund is money set aside for a specific purpose. It helps you prepare for large purchases, so when the time comes, you already have enough money saved. Think about future expenses. What major purchase do you have coming up. Do you want a new outdoor dining set? Start a sinking fund for it! 

Think of it like this: Instead of being caught off guard by a big expense, you plan for it in advance. You add small amounts to your sinking fund over time. When you finally need the money, it’s there waiting for you. No stress. No debt. Just peace of mind.

Imagine climbing up a ladder, at first you are only one rung up, then four, and before you know it you are at the top. Each little rung in the ladder adds up and helps to get you to where you want to go.

What Can You Use a Sinking Fund For?

You can have a sinking fund for anything that requires a larger sum of money. Maybe you are wanting to save up for a down payment on a house! Here are some common examples:

• A new car – Save over time so you don’t have to take out a big loan.

• Car repairs & car maintenance – Think new tires, oil changes, and those unexpected fixes.

• Christmas & holidays – Avoid last-minute holiday panic by saving throughout the year.

• Large vet bills – Yearly checkups, vaccinations, or unexpected pet emergencies.

• Vacations & plane tickets – Travel stress-free knowing you’ve already set aside money.

• Home repairs – Water heaters, roof repairs, and other big expenses that come up.

If you know an expense is coming, a sinking fund is a good idea to make it manageable.

A sinking fund is like planting seeds in a garden. Each time you add a little money, it’s like watering your plants. It doesn’t grow overnight, but if you keep at it, one day you’ll have a harvest ready to enjoy. 

Sinking Fund vs. Savings Account

A savings account is for general savings. A sinking fund is for a specific purpose.

Your emergency fund and general savings are there for unexpected life events. A sinking fund is a planned fund. You set aside money over time, knowing exactly what it’s for.

You can keep your sinking fund in a separate account or a money market account for easy access. Some people prefer to keep it in a checking account with subcategories.

Sinking Fund vs. Emergency Fund

A sinking fund is planned savings. An emergency fund is for the unexpected.

An emergency fund covers things like job loss, medical bills, or sudden home damage. A sinking fund covers things you know are coming—like Christmas, car repairs, or a vacation.

Both are important, but they serve different purposes. Let’s talk just a bit about having an emergency fund and why we need one. 

Starting an Emergency Fund (Also Important)

1. Decide How Much You Need

Start small. $1,000 is a great beginner goal. It’s usually enough to cover minor emergencies. However, the long-term goals is to aim for three to six months of expenses. That’s your full emergency fund.

It’s the cushion that gives you peace of mind if you lose your job or face a major crisis. But for now, just focus on building that first $1,000.

If you don’t know what three to six months of expenses are, then start the process of creating a simple monthly budget. A budget will help give you a starting point for how much you need in your emergency fund. 

2. Choose Where to Keep It

An emergency fund needs to be easy to access but not too easy. You don’t want it sitting in your checking account where you might be tempted to dip into it for non-emergencies.

3. Start Saving – Even If It’s Small

Don’t get stuck thinking you need to save a huge amount all at once. Small, steady progress is the key. Set aside $10, $20, or $50 per week – whatever fits your budget.

Even if you can only save a little at at time, it adds up faster than you think. The important thing is to start.

Just Start Today – Time for the Emergency Fund

Having an emergency fund is one of the best things you can do for your financial peace of mind. It keeps you from stressing when unexpected expenses pop up. It helps you stay out of debt. And it gives you control over your money instead of the other way around. 

So start today. Set a goal. Pick a place to keep it. Save a little at a time. Before you know it, you’ll have a safety net that makes all the difference when life throws the unexpected your way. 

Sorry, I know that was a bit of a rabbit trail, but they compliment each other and make a great team. Emergency Fund + Sinking Fund = Peace of Mind. 

The Benefits of Sinking Funds

Why should you start a sinking fund? Here’s why it works:

• Avoids debt – You won’t need to rely on credit cards or loans.

• Reduces stress – No more last-minute panic over big expenses.

• Helps with budgeting – You know exactly where your money is going.

• Keeps you financially secure – You’re in control of your money, not the other way around.

How to Create a Sinking Fund

Ready to start? Here are the exact steps to set up your sinking fund today.

1. Decide What You’re Saving For

What big expenses do you have coming up? Pick one or more sinking funds. Start small if needed. Maybe you want to go on a cruise at the end of the year. That is a big purchase worth creating a sinking fund for.

Use any extra money you bring in or find in your budget to go towards this specific goal. 

2. Decide Where to Store Your Sinking Fund

• Checking account – If you need easy access.

• High-yield savings account – Earns a little extra interest. They typically have higher interest rates when compared with a regular savings account. 

• Money market account – A mix of savings and checking benefits.

3. Decide How Much You Need to Save

Figure out the total cost of your goal. Then divide it by the number of months you have to save.

For example:

• Need $1,200 for Christmas in 12 months? Save $100 per month.

• Need $600 for car repairs in six months? Save $100 per month.

4. Set Up Your Sinking Fund in Your Budget

Use a budgeting app like EveryDollar to track your sinking funds. It’s free and easy to use. I have been using the FREE version of EveryDollar for years.

You have to know what your monthly expenses are in order to tell your money where to go. Otherwise, it will serve no particular purpose and it’ll be gone before you even know where it went. Tell your money where to go! Here are some simple money habits that you can start today!

5. Automate Your Savings

Set up an automatic transfer so money goes into your sinking fund every payday.

6. Watch It Grow

This is the fun part! As your fund grows, you’ll feel peace of mind knowing you’re prepared. You may not start out with very much money, but just like drips of water into a jar, it will add up.

Those large expenses won’t seem as large because you created sinking fund goals. Take the first step and throw a small amount into an envelope today.

You don’t even have to go to the bank to start. Just label an envelope or a ziplock bag with the goal item and start putting the money in there. 

Having More Than One Sinking Fund

You can have multiple sinking funds at the same time. Start with one or two, then add more as you get comfortable.

Some people keep separate accounts for each sinking fund. Others use one account and track the different categories in a spreadsheet or budgeting app. Do what works for you!

How to Save for a Sinking Fund: Daily, Weekly, Monthly, Yearly

If you’re just starting, small steps add up. Here’s how to break it down:

Daily Tips

• Skip small purchases (like that extra coffee run) and put the money in your sinking fund.

• Round up your purchases and transfer the extra change into savings.

Weekly Tips

• Set aside a fixed amount from your weekly budget. Start doing this on a regular basis. 

• Sell unused items in your home and put the money in your sinking fund.

Monthly Tips

• Review your budget and adjust if needed.

• Set up automatic transfers for consistency.

Yearly Tips

• Plan ahead for major expenses.

• Use tax refunds or bonuses to boost your sinking fund.

Encouragement to Get Started

If you’ve never used a sinking fund before, now is the time to start. It’s one of the best ways to stay out of credit card debt and reach your financial goals.

You don’t have to start big. Even setting aside $10 a week makes a difference. Over time, you’ll see how freeing it is to have money ready when you need it.

A sinking fund gives you peace of mind. It helps you handle big expenses without worry. And the best part? It puts YOU in control of your money.

Try it today. Trust me, you’ll be so glad you did. 

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