How To Use Sinking Funds To Help You Save Money

Sinking funds are a great way to save money for future expenses you know that you will have coming up. These can be routine annual expenses like an Amazon Prime membership or a goal you are working toward like a downpayment on a house. The idea behind a sinking fund is to have enough money saved up over a designated time period so it is there when you need it. In this post, I will show you how to save money for your upcoming expenses using sinking funds.

beginner's guide on how to use sinking funds

Are you on taking your family on a summer vacation next year? Looking to buy a house and need to save up a down payment?

Let me introduce you to sinking funds! The first time I hear that term I thought it referred to some kind of offshore bank account that wealthy people who owned yachts had. How can I have a “sinking fund” when I am eating ramen noodles and mac & cheese from a box every night?

Well, I am so glad I was wrong! Sinking funds have forever changed how we manage our money and save for expenses. They have made it possible to pay cash for our vacations, Christmas, real estate taxes, and our cars. All, without going into debt.

You see, sinking funds are not just for wealthy people. They are also for everyday people like you and me who want to live debt-free and be on control of our money.

What is a sinking fund?

A sinking fund is an easy way to save money every month for big expenses like home repairs, or fun things like vacation. You choose the sinking fund you want and how much you want to put in it based on how much your expense will be, and how long you will save for. Remember, these include fun expenses too (think, replacing your summer wardrobe).

woman creating budget with money and a calculator with piggy bank on the desk

Your sinking fund will be a line item on your budget.

For example, if you have a goal of paying cash for your next car, you can include that sinking fund in your budget. Let’s look at some basic numbers:

Total cost of car : $12, 000 Time needed to save: 2 years

Amount to Budget each month: $500

You can see in the sample budget below that there is a line item specifically for a car replacement sinking fund. If you saved $500 every month for 2 years, you would have $12,000 saved to pay cash for your next car.

Let’s say that you are unable to save $500 each month, but $250 is more reasonable for you. You can save $250 for 3 years and purchase a $9000 car in cash. The idea here is to save for what you can afford, and what will work for YOUR budget – remember we are staying OUT of debt!

Example of A Sinking Fund

Emergency Fund    
Car Replacement$500 $500 1/2021 ✔️
Vacation$200  $200 1/2021 ✔️

You can apply the same strategy for your next vacation! By simply saving $200 a month over one year, you would have $2400 for your next vacation. You decide how much you want to spend and divide that over the time period you want to save.

***Please note that on the sample budget above there is a PAID column. Once you have “paid” your sinking fund, mark ✔️ on your budget***

Sinking funds are not used for routine monthly expenses such as mortgage/rent, utilities, cell phone bills, or credit cards. I will talk more about what expenses are perfect to use with sinking funds in a bit. Next, let’s talk about how they work.

how do sinking funds work?

Once you have decided on what your savings goals are, you will need to decide where your sinking funds will live. There are several online banks like Ally and Capital One 360 that allow you to have multiple sinking fund accounts housed within one savings account. Think of these savings accounts as digital envelopes that you keep nice and tidy until ready to use. However, unlike real envelopes, these digital envelopes can earn you some interest. Whichever bank you decide to use, make sure they do not have any fees associated with them.

When you have determined how much money you would like to save in your sinking fund each month, set up a plan to get that money in there. We make one deposit a month into all of our sinking funds. You could even set up a direct deposit from your payroll right into your sinking fund, or an automatic transfer from one account to another.

When you’ve reached your savings goal toward your intended purchase or expense, move the money in your sinking fund over to a checking account or withdrawal the cash. You now have money ready to use toward your expense.

Related Post: How to Create a Realistic Monthly Budget

Sinking Fund Categories for beginners

Now that you understand what sinking funds are and how they work, let’s look at some different types of sinking funds categories you should have.

1. vacation fund

We all need to get away. Most of us don’t have the ability to book a trip to Hawaii whenever we feel like it. It takes planning and it takes money to do so. But, with a vacation sinking fund you can make your vacation happen. Decide on where you want to go and what your vacation budget will be and start saving. Using the example I gave you earlier, create a line in your budget for your vacation sinking fund and keep at it every month. Soon, you will have your toes in the sand and umbrella drink in hand!

vacation sign on a tropical beack

2. christmas fund

This is one holiday that you can count on coming around every year! And, let’s face it, it isn’t a cheap one. Again, same idea applies with Christmas. Decide in January (or whenever you choose to start) exactly how much you want to spend on Christmas. Take that amount and divide it by 12 for the 12 months in the year. That is the amount you will save each month in your Christmas sinking fund.

3. car replacement

Hold Up!! Are you saying we’re going to save up cash for a car? Yep! I know, you might be thinking, “This lady is not in reality- does she get how expensive cars are?” Oh, believe me, I do. But, I want to help you change how you think about vehicles. They are a means of getting you from point A to point B. That’s it! Nothing more than a glorified bicycle. You do not need a fancy car and YOU CAN pay cash for a car.

I am super passionate about helping you get and stay out of debt. And cars are a huge debt when financed. And, they are one of the biggest budget busters. I gave you an example earlier of saving $250-$500 a month for a car replacement sinking fund over 2 to 3 years. This would give you the opportunity to purchase a car for $9,000-$12,000 respectively, with cash. That’s it! You own the car. Doesn’t that sound so much better than making car payments for 72 months!!! You just shaved off 3-4 years of car payments! Not to mention the interest money you’d save!

4. home repairs/upgrades

Do you want to upgrade or repair some things in your house? Start a home repair/upgrade sinking fund and save for what you’d like to get done in your house.

5. Real estate taxes/hoa fees

Some people choose not to include their real estates taxes in their monthly house payment (escrow). That’s fine, just make sure that you have a plan throughout the year so you are not hit with a large bill all at once. A real estate/property tax sinking fund will help you plan for this expense over the course of the year. The same plan applies, take the amount of your taxes and divide by 12. Save that amount all year long so you will be ready when you get that bill.

If you live in a community that has a home owner’s association (HOA), you can set up a sinking fund for this as well.

6. Professional license/organization fees

If your professional career requires you to keep a current license, join the club. As a nurse I am required to renew my license every two years. This come with a price tag. So, instead of waiting until the last minute to pay the renewal fee, I have a sinking fund to save over 24 months for it.

You can do the same with any professional organization fee that you have to pay in order to stay or become a member.

7. downpayment on a house

This is probably one of the best reasons to have a sinking fund- to save for a downpayment on a house. The best way to save up a large amount of money like a home downpayment is by automatic payroll deposit if your employer and bank offer it. This way, the money goes right into your account and you don’t even miss it. Put that on autopilot and forget about it. Yes, you do want to check in on it every now and again to celebrate your progress.

for sale sign with a house in the background

8. seasonal clothing

This category may not work the same for everyone. But unless you live in Florida or Southern California, you will need seasonal clothing. Tucking some money away in a sinking fund can help offset expenses when it is time to go from wearing shorts to parkas.

Now, I am not suggesting that you go and replace your entire wardrobe, but let’s face it- our styles change and clothing gets dingy after a while.

If you have kiddos you know that they grow, fast. Back to school time can get expensive real quick. Having a sinking fund for your kid’s back to school clothing needs can help reduce the overwhelm that this time of year can bring.

Sinking funds are a great way to save for future things that you know will happen again and again. They have been a lifesaver for us and I know they can be for you too.

If you have been using sinking funds, what categories to you have set up. Drop a comment below or email be at

Happy saving!


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