Everything You Need to Know About Sinking Funds

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Dollar-cost averaging, net worth, index funds, baby steps, the list goes on.  When making the decision to take control of your money, it seems like there is an endless amount of new terms and phrases to become familiar with.  Join any Instagram community or Facebook group dedicated to personal finance, and among these phrases, you will notice two words that, while simple in theory, seem to cause constant confusion: sinking funds.

Sinking funds are not nearly as confusing as they seem.  Learn how to add them to your monthly budget to keep you on track for your version of financial freedom!

So, what is a sinking fund?

It’s simple.  “Sinking fund” is the term used for a small, monthly contribution to short-term savings for goals or unexpected expenses.  The method of savings can be in the form of cash envelopes or savings accounts, whatever your personal preference may be.  These funds are separate from – and keep you from having to tap into – your emergency fund.

Why are they used?

To keep yourself from busting your budget, “being forced” to withdraw money from your emergency fund or use a credit card for something that, with proactive planning, would not have been considered an emergency.

Who needs them?

Anyone who desires inconveniences instead of emergencies and seamless, debt-free plans/holidays/celebrations/upgrades instead of stressful, last minute scrambling.  Seriously, regardless of where you are in your debt free journey, everyone should have sinking funds.

What categories should be covered, and how many should I have?

This is completely up to you!  While I recommend definitely having sinking funds to cover house repairs, car repairs, medical bills, etc., the rest should be tailored to fit your lifestyle.

With that being said, below are the eight sinking funds my husband and I currently have.

It is not only possible to having sinking funds while paying off large amounts of debt, having them keeps you on track!  Learn the sinking funds we use while paying off our mortgage.

1. Car Maintenance

This is used for flat tires, new brakes, oil changes and any other expenses that come with owning a vehicle.  Whether you have a shiny, new car or an ugly, typical “Dave car,” you need to be prepared for these expenses.  After our mortgage is paid off, we will start a sinking fund to replace our vehicles while still contributing to our “Car Repair” fund.

RELATED: How We are Paying Off Our Mortgage in Two Years

2. House Repairs

As with car maintenance, this fund is set up to cover the never-ending costs associated with being a homeowner.  The parts and/or labor required to maintain our house are taken care of with money from our “House Repair” sinking fund.

3. Family

This one is mostly used for medical bills that arise for my family, as well as veterinary costs for our cat.  Unbudgeted costs will also come up from time-to-time in the form of field trips, school projects and cheerleading events, and this fund covers them.

RELATED: Six Tips for Throwing a Fun, Frugal, Stress-Free Birthday Party for Your Child

4. Vacation

Whether it’s a family vacation planned out months ahead or a spontaneous weekend trip with friends, this fund keeps us covered.  After booking the hotel and travel arrangements, we cash out the rest to use for every aspect of our vacation – gas, eating out, souvenirs, events, etc.  Doing this keeps us from swiping our debit card wildly while on our escape from reality.

5. Annual Payments

This fund saves so many headaches.  While most of our payments are set up on automatic, monthly withdrawals from our checking account, we have several that are drafted yearly.  Examples include our XBOX subscription, Amazon Prime and life insurance.  When the service is established, I divide the yearly payment amount by 12 and transfer that amount to our “Annual Payments” sinking fund.  Instead of having a separate account for each yearly payment, we just add the divided amounts together and set aside that amount per month.  


  • XBOX: $72/year = $6/month
  • Life Insurance: $180/year = $15/month
  • Amazon Prime: $108/year = $9/month

6+15+9=$30/month contributed to our Annual Payments sinking fund.

[NOTE: We canceled Amazon Prime as an experiment to see if we would even spend $108 in shipping charges within one year.  Four months and over $120 in shipping charges later, we signed up again.  If you can control yourself by sticking to your budget, this service saves money over the course of a year.  Use this link to get your first thirty days for free: Try Amazon Prime 30-Day Free Trial]

6. Tattoos

My husband wants to start working on a sleeve soon, and I’ve had the itch for another one lately, too.  Good tattoos are expensive, so contributing monthly to this sinking fund makes paying for them much easier.

7. Football

Several sacrifices were made when my husband and I decided to live on one income so that we could pay off our house ASAP, but our yearly season tickets to UT football games were non-negotiable.  To keep this expensive hobby in our lives, we set up this sinking fund as soon as the decision was made.  The amount we contribute will cover the cost of tickets, parking and concessions.

[Note: From individual tickets to hospitality packages, is a one-stop shop for worldwide sporting events.  The site is secure and the authenticity of the tickets is guaranteed.] 

RELATED: Instant Gratification of Goal Milestones

8. Gifts

Christmas and birthdays are covered by this one, as well as the ongoing, unbudgeted events that come up along the way – graduations, gender reveals, weddings, bridal and baby showers, kids’ birthday parties and so on.  

Regardless of where you are on your debt-free journey, I recommend at least having this fund for Christmas.  Eating the Christmas elephant one bite at a time through the course of the year is much less stressful than trying to swallow it all at once.

RELATED: Debt Payoff Report: Month 4

Where should sinking funds be kept, and how do I access the money?

Some use cash envelopes for their sinking funds, but most commonly, savings accounts are set up.

Each of our eight sinking funds listed above has its own savings account at the same credit union as our checking account.  Our local credit union has no fees, and I suggest checking around to find a local credit union or online bank that provides the same service.  The savings accounts earn a laughable interest rate, but these funds are not intended to be treated as investments.  As an extra convenience, we are able to label the accounts however we want.

The easiest way to access the money is to pay with your checking account’s debit card, then transfer the amount from the sinking fund to your checking account by logging into your account online.  I log into our account every morning to balance our budget, and if any transactions came out of our checking account the previous day that are covered by our sinking fund, I simply transfer that exact amount from the appropriate sinking fund savings account to our checking account.

Got it!  Where do I start?

Five simple steps for adding sinking funds to your monthly budget to help you stay on track while paying off debt.

1. Evaluate your lifestyle.  

Think of not only the necessities (medical needs, kids, pets, etc.), but your desires, too – giving to people in your community when in need, traveling, hobbies, saving for a cosmetic procedure, whatever brings you joy.  

For the necessary sinking funds, try to estimate how much you may need per month to feel comfortable and take care of your needs.  If you’re planning a vacation or saving for a goal, figure up a high estimate of the amount you’ll need and divide by the number of months you have to save.

2. Adjust your budget.

This is overwhelming when you’re first setting up sinking funds, and seeing the total amount they steal from your budget can make you question if it’s worth it.  Trust me – the necessaries are worth it, especially when you’re doing everything you can to achieve debt freedom.  I know you want to be gazelle intense and throw every single available dollar at paying off debt, but one flat tire with no sinking fund can completely ruin your week and your budget while disheartening you, even possibly derailing you from your goals.  I cannot explain how peaceful it is to no longer be completely distraught by ending up on the side of the road with a flat tire.

You can always put a cap amount on a sinking fund if it’s a slow-moving fund.  For instance, if you have a full emergency fund and feel comfortable with $500 in your sinking fund for house repairs, halting monthly contributions at that amount will allow more room in your budget for other needs, wants or goals.  If parts have to be purchased for a repair later on, you can start your monthly contributions back up until you reach that amount again.

3 . Set up your accounts.

Once you find a bank or credit union to fit your needs, let them know how many savings accounts you would like to set up and the names that should be assigned.  I walked in to mine on a Saturday morning, handed one of the clerks a simple typed and printed list and was out the door within ten minutes.

[NOTE: If you’re looking to make the switch to a no fee bank as I described above, check out Chime Bank.  They take no fee banking to a new level by charging zero fees for transfers, maintenance, overdrafts or bounced checks and have no minimum balances. Use this link to get $5 when making an opening deposit!]

4. Enable online banking.

Register for online banking on your bank or credit union’s website and learn how to transfer between accounts.

5. Work the system.

When a purchase is made for a product/repair covered by a sinking fund, transfer the amount from that fund back to your checking account.

Easy, right?  My husband and I love using this system to keep us on track, and I hope that it helps you and your family, as well.  If you use a different method to manage your sinking funds, I would love to hear about it!

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  1. Great read. I have a small stinking fund as well. They’re really helpful and not hurt your bank when you need to pay something.

  2. Karyn says:

    This is a great read. I will have to check with my bank to create sinking funds like you did. Thank you.

  3. […] out precisely.  I received my check, used it to finish funding our emergency fund and set up a monthly sinking fund to prepare us for the new responsibility of paying our property […]

  4. Nikole says:

    I love this idea! Personally, I have a regular savings and checking account with one bank and another savings account with a different bank that I cannot touch. I work two jobs so one is going into the savings account for my honeymoon, the other my day to day expenses. It keeps me on track a lot more than I imagined it would!

  5. […] [Find out more about my numerous sinking funds here.] […]

  6. […] the extra paycheck meant that we won’t have to touch our sinking funds or our emergency fund for whatever repairs my car will […]

  7. […] not adults, making things a lot less stressful than they could be. We used our “Gift” sinking fund for the purchase of presents again this year, which also goes a long way in alleviating […]

  8. […] amount, and I was excited to delete the line titled “Mortgage.” We also deleted several sinking funds that we feel no longer are needed now that we have no debt and are living so far below our […]

  9. […] and is now $100 short of our desired $5,000. We have a couple thousand distributed across our three sinking funds, so this isn’t a big deal to us at […]

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  11. […] also created a new sinking fund this month for quarterly couples massages that we intend to start getting in June. We love getting […]

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