Sinking Funds… What?
What Is a Sinking Fund?
A sinking fund is a dedicated savings category for future expenses—think of it as planned savings for predictable costs like car repairs, holiday gifts, or annual insurance premiums. Instead of scrambling when an expense pops up, you’ve already set money aside for it.
Sinking funds get their name from a financial strategy used by businesses and governments. Originally, companies would set aside money over time to "sink" their debt or replace expensive assets (like bonds or equipment) without a huge financial hit all at once.
In personal finance, the concept works the same way—you gradually save for future expenses so that when the time comes, you don’t have to take a big financial hit or go into debt. Instead of sinking into financial stress, you're sinking money into a specific fund to be prepared!
I swear by sinking funds, and I use them for everything. Right now, I have one for my bestie’s bachelorette party and wedding, which—if she has any say in the matter—will be in about two years (plenty of time to save!). I also set up sinking funds for vacations, because nothing makes a trip more enjoyable than knowing it’s already paid for.
But my favorite way to use sinking funds? Annual payments. I add up all my yearly expenses—credit card fees, pest control, annual vet appointments, etc.—divide the total by 12, and transfer that amount into my “annual payments” sinking fund each month. Then when a bill comes up, I just pull it from that fund instead of scrambling to cover it. It’s like having a financial safety net for predictable expenses.
Types of Sinking Funds
Irregular Bills: Property taxes, insurance, memberships
Planned Expenses: Holidays, birthdays, vacations
Home & Car Repairs: Unexpected but inevitable costs
Medical Costs: Out-of-pocket expenses, copays, dental work
How to Set Up Sinking Funds
List upcoming expenses: Identify what you need to save for in the next 6–12 months.
Break it down: Divide the total amount by the months remaining until the expense.
Automate savings: Set up automatic transfers into a separate sinking fund account.
Sinking funds help you stay financially prepared and reduce stress. Instead of feeling blindsided by expenses, you can tackle them head-on with a solid plan.
Do you use sinking funds? What’s one category you plan to start saving for?
