We all want to save money, and there are a million resources and tips that will help you do just that.

But… What happens when you want to make a purchase? Do you draw that directly from your savings account or emergency fund? Do you put it on your credit card?

Not if you have a sinking fund!

A sinking fund allows (and encourages!) you to spend money because it helps you save for a purchase you have planned for.

Today, we are going to explore sinking funds, what they are, and how to set one up.

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What is a sinking fund?

In a nutshell, a sinking fund is when you set aside money each month for upcoming events or expenses.

By setting aside money in a sinking fund, you prepare yourself for upcoming expenses without the need to withdraw from your savings or emergency fund.

Why do I need a sinking fund?

Unexpected expenses come up, large purchases arise, and life happens!

If you don’t have a sinking fund in place, you may be forced to pay for these things with your emergency fund or credit card.

Definitely not ideal.

Strategically saving money in a sinking fund allows you to take on these expenses with ease. In fact, a sinking fund lets you spend money guilt free because you have planned and prepared for it.

Say goodbye to the days when you felt surprised for holiday expenses, trips, car maintenance, and technology replacements!

How do sinking funds work?

When creating a sinking fund, you set aside money each month for an upcoming expense. 

For example, let’s say you are planning to take a vacation in 6 months that will cost $1,500.

So, if you set aside $250 a month into a sinking fund for the next six months, you will have enough to pay for the vacation guilt free!

How are sinking funds and emergency funds different?

Essentially, a sinking fund is created for planned large expenses. An emergency fund is created for unpredictable emergencies.

Do you really want expenses for a vacation to detract from your emergency fund in the event that you lose your job? 

Neither do I.

What’s the difference between a sinking fund and a savings account?

On paper, sinking funds and savings accounts look pretty similar.

The difference between the two comes down to this:

• Savings accounts are primarily used to achieve some type of financial goal. The money set aside in a savings account is likely intended to stay there until the goal is achieved.

• Sinking funds are meant to be spent! You are setting aside money for a planned expense that you know will arise in the near future.

Theoretically, yes, you could keep your sinking funds in the same account as your savings. But most financial experts do not advise this because it takes so much more will power, organization, and self-discipline not to spend any money designated for savings.

Interested in learning more about savings accounts? Check out this post on Why You Should Have A High Yield Savings Account.

Types of Sinking Funds

So, you’re sold on setting up a sinking fund and now you want to know what types of sinking funds there are!

The possibilities are endless--the types and number of sinking funds you create are entirely dependent on you and your spending goals.

Common types of sinking funds:

• Large purchases like laptop replacements, home renovations, or vacations.

• Irregular expenses like insurance payments, car registration fees, etc.

• Unplanned expenses like home and car maintenance.

• Anything else you would like to save for!

Seriously, sinking funds are awesome and you can use them to save for anything and everything you set your mind to.

Where to store your sinking funds

You can store your sinking funds in any savings account, but I recommend using a high yield savings account due to their higher interest rates.

If you choose to keep all of your funds in one account, just make sure that you keep a record of how much money you have saved for each category using something like my Sinking Funds Tracker below!

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