What are sinking funds and how do they work?
A sinking fund is money you set aside a little at a time for a specific expense you know is coming: holidays, car repairs, an annual insurance premium. When the bill arrives, the money is already there.
Sinking fund vs emergency fund
| Sinking fund | Emergency fund | |
|---|---|---|
| For | Known, planned expenses | Unknown emergencies |
| Amount | The expense's cost | 3–6 months of expenses |
| Spent | On schedule | Only in emergencies |
| Example | $800 for December gifts | Job loss, medical bill |
Example: six funds on biweekly pay
| Fund | Target | Time | Biweekly checks | Per paycheck |
|---|---|---|---|---|
| Holiday | $NaN | undefined mo | NaN | $NaN |
| Total | $NaN |
That total is high for many budgets, so start with the two or three that most often catch you off guard. Calculate yours with the sinking fund calculator.
Where to keep sinking funds
A high-yield savings account separate from checking, ideally with labeled sub-accounts or "buckets" (many online banks offer these). Avoid keeping them in checking, where they look like spending money.
Using 3-paycheck months
Your two extra biweekly checks are a fast way to fully fund a year of sinking funds. See what to do with the third paycheck.
Five steps to start this week
- Look at last year's bank statements for big irregular costs.
- Choose the two that hurt most when they hit.
- Set a target and date for each.
- Divide by the paychecks left (the calculator does it).
- Schedule an automatic transfer for every payday.
Why they work
Most budgets fail on "surprise" expenses that aren't really surprises: the car needs tires every few years, the holidays come every December, insurance renews on a known date. A sinking fund turns a $900 shock into a $35 line on every paycheck, which is the difference between using a credit card and not.
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Frequently asked questions
How do sinking funds work?
You save a fixed amount every paycheck toward a known expense and spend it when the expense comes due.
Are sinking funds the same as savings?
They are savings with a specific purpose and date, separate from your emergency fund.
How many sinking funds should I have?
Start with 2–4 for your most common irregular expenses and add more as your budget allows.