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Every December, I used to panic about holiday spending. Every six months, car insurance would “surprise” me with a $600 bill. Every year, my annual subscriptions would hit my credit card all at once. None of these expenses were actually unexpected — I just wasn’t planning for them. That changed when I discovered what are sinking funds and started using them. Now those predictable expenses are covered before they arrive, and the financial stress they used to cause is completely gone.
A sinking fund is one of the simplest, most powerful budgeting tools that most people have never heard of. If you’ve ever been caught off guard by a bill you knew was coming, sinking funds will change how you manage money. Here’s exactly what are sinking funds, how they work, and how to set them up in less than 30 minutes.
What Are Sinking Funds?
A sinking fund is money you set aside gradually for a specific, planned future expense. Instead of scrambling to find $600 when your car insurance is due in June, you save $100 per month starting in January. When the bill arrives, the money is already waiting.
The concept is simple: take any predictable expense that doesn’t occur monthly, divide the total cost by the number of months until it’s due, and save that amount each month. By the time the expense hits, you pay it from the sinking fund — no credit card debt, no emergency fund raid, no stress.
What are sinking funds compared to an emergency fund? The distinction matters. Your emergency fund covers genuinely unexpected events — job loss, medical emergencies, car breakdowns. Sinking funds cover expenses you know are coming but don’t occur every month. Christmas happens every December. Your car registration renews annually. These aren’t emergencies — they’re predictable events you can plan for.
According to the Consumer Financial Protection Bureau, one of the top reasons people go into debt is irregular expenses they didn’t budget for. Sinking funds eliminate that problem entirely.
How Sinking Funds Work (Step by Step)
Setting up sinking funds takes about 30 minutes and saves you from financial surprises all year long:
Step 1: Identify Your Irregular Expenses
Go through the past 12 months of bank and credit card statements. Look for any expense that doesn’t occur monthly. Common ones include:
- Annual insurance premiums (car, renters, home)
- Holiday and birthday gifts
- Car maintenance (oil changes, tires, registration)
- Annual subscriptions (software, streaming services billed yearly)
- Medical expenses (annual checkups, dental visits, prescriptions)
- Back-to-school supplies
- Vacation spending
- Home maintenance (repairs, seasonal upkeep)
- Pet expenses (vet visits, grooming)
- Clothing (seasonal wardrobe updates)
Write down every irregular expense you can identify, along with the approximate cost and when it typically occurs.
Step 2: Calculate Monthly Savings Amounts
For each expense, divide the total anticipated cost by the number of months until it’s due.
Examples:
- Holiday gifts: $600/year ÷ 12 months = $50/month
- Car insurance: $1,200/year ÷ 12 months = $100/month
- Car maintenance: $800/year ÷ 12 months = $67/month
- Annual subscriptions: $300/year ÷ 12 months = $25/month
- Vacation: $1,500 ÷ 10 months of saving = $150/month
Step 3: Decide Where to Keep the Money
You have a few options:
Separate savings accounts. Many online banks let you create multiple named savings accounts for free. Create one for each sinking fund — “Holiday Fund,” “Car Maintenance,” “Vacation.” This is the clearest approach because you can see exactly how much is in each fund.
Single account with a spreadsheet tracker. If opening multiple accounts feels like too much, keep all sinking fund money in one savings account and track the allocations in a spreadsheet. You know the account holds $800 total, but your tracker shows $300 is for holidays, $200 for car maintenance, and $300 for vacation.
Budgeting app categories. Many of the best free budgeting apps support category-based savings tracking. YNAB is particularly well-suited for sinking funds because it lets you assign every dollar a specific job.
Envelope method. If you prefer cash, you can use physical envelopes — similar to the envelope budgeting method — with each envelope labeled for a specific sinking fund.
Step 4: Automate Monthly Contributions
Set up automatic transfers on payday. If you’ve determined you need $50/month for holidays and $100/month for car insurance, schedule those transfers to happen automatically. The money moves before you have a chance to spend it — the same principle behind the “pay yourself first” strategy.
Automation is the key to making sinking funds work. If you rely on manually transferring money each month, life will get in the way and funds will fall short.
10 Sinking Fund Categories Everyone Should Consider
Here’s a starting list. You won’t need all of them — pick the ones that match your life:
1. Holiday and gifts. Budget for Christmas, birthdays, anniversaries, weddings, baby showers, and any other gift-giving occasions. Most people underestimate annual gift spending by 30-50%.
2. Car maintenance and repairs. Oil changes, tire rotations, brake pads, registration, inspections. Even reliable cars need $800-$1,500/year in maintenance.
3. Medical and dental. Annual physicals, dental cleanings, prescriptions, copays, glasses or contacts. If you have a high-deductible plan, this fund is essential.
4. Insurance premiums. If you pay car, renters, or home insurance annually or semi-annually (often at a discount versus monthly), a sinking fund makes the lump sum painless.
5. Vacation and travel. Save monthly toward trips so you never go into debt for a vacation. Even a modest $100/month gives you $1,200 for an annual trip.
6. Home maintenance. A common rule is to budget 1-2% of your home’s value annually for maintenance. For renters, this might cover moving costs, security deposits, or furniture replacement.
7. Annual subscriptions. Software, streaming services, memberships, and professional dues that bill annually. Add them up — you might be surprised. Our guide on cutting monthly subscriptions can help you trim this category first.
8. Back-to-school and kids’ activities. School supplies, sports registration fees, field trips, summer camp. These costs are predictable even if they don’t feel like it.
9. Pet care. Annual vet visits, vaccinations, grooming, and a buffer for unexpected pet health issues.
10. Clothing. Seasonal wardrobe updates, work clothes, kids’ clothing (they grow fast). Budget a modest amount monthly instead of occasional spending sprees.
How Sinking Funds Fit Into Your Overall Budget
Understanding what are sinking funds becomes even more powerful when you integrate them into a broader budgeting framework.
If you use the 50/30/20 budget rule, sinking funds for essentials (insurance, car maintenance, medical) come from your 50% needs category. Sinking funds for wants (vacation, gifts, clothing) come from your 30% wants category. And your emergency fund contributions come from the 20% savings category.
The beauty is that sinking funds convert irregular expenses into predictable monthly amounts — which makes every budgeting method work better. Instead of a $600 insurance bill blowing up your January budget, you’ve been saving $50/month all year. January looks exactly like every other month.
If you’re budgeting on irregular income, sinking funds are even more critical. They create predictability within an unpredictable income stream.
Common Sinking Fund Mistakes to Avoid
Starting too many at once. If you try to fund 10 categories from day one, the monthly total might feel overwhelming. Start with 3-5 that represent your biggest financial surprises, then add more as your budget allows.
Raiding sinking funds for other purposes. Your holiday fund is not your “impulse purchase” fund. Keep each fund dedicated to its purpose. If you need money for something else, that’s what your emergency fund or general savings is for.
Not adjusting amounts over time. If your car maintenance cost more than expected last year, increase that sinking fund next year. Review and adjust your sinking fund amounts every 6-12 months based on actual spending.
Forgetting to replenish after spending. When you use a sinking fund — say, you spend the $600 holiday fund in December — restart contributions in January. The fund is meant to be a perpetual cycle, not a one-time savings effort.
Start Your Sinking Funds Today
Now that you understand what are sinking funds and how they work, the next step is simple: look at your next 6 months and identify 3 expenses that are going to catch you off guard if you don’t prepare. Calculate the monthly savings amount for each, set up automatic transfers, and let the system work.
Within a few months, you’ll experience something most people rarely feel: a big bill arriving and realizing the money is already there. That feeling of financial calm is worth every minute of setup.
For the complete foundation on building a budget that accounts for every type of expense, read our guide on how to budget and save money for beginners.
FAQ Section
What is the difference between a sinking fund and an emergency fund?
A sinking fund covers planned, predictable expenses that don’t occur monthly — like annual insurance premiums, holiday gifts, or car maintenance. An emergency fund covers genuinely unexpected events — job loss, medical emergencies, or sudden car breakdowns. Both are essential, but they serve different purposes and should be kept separate.
How many sinking funds should I have?
Start with 3-5 that cover your biggest irregular expenses. Common starting categories are holidays/gifts, car maintenance, medical expenses, insurance premiums, and vacation. You can add more over time as your budget allows and you identify additional irregular expenses.
Where should I keep my sinking fund money?
A high-yield savings account is ideal because the money earns interest while waiting to be used. Many online banks allow you to create multiple named sub-accounts for free, making it easy to track each fund separately. Alternatively, use a single savings account with a spreadsheet to track allocations.
How much should I put into sinking funds each month?
Add up all your anticipated irregular expenses for the year, then divide by 12. If your total annual irregular expenses are $6,000, you need $500/month across all sinking funds. Prioritize the most important categories first if you can’t fund everything immediately.
Can I use sinking funds if I have debt?
Yes, and you should. Sinking funds prevent you from going further into debt when predictable expenses arise. Without them, you’re likely using credit cards for irregular bills — which adds interest and makes debt payoff harder. Fund at least your most critical sinking funds (insurance, car maintenance) even while paying off debt.
What are sinking funds versus savings goals?
They’re very similar concepts. Sinking funds specifically target recurring irregular expenses (things you know you’ll need to pay periodically). Savings goals are broader and might include one-time targets like a down payment or a large purchase. In practice, the mechanics are the same — save a set amount monthly toward a specific purpose.
Toyin Onagoruwa is the founding editor of BrokeMeNot. He works as a software engineer in banking and has over 5 years of experience writing about personal finance, credit cards, and frugal living. He combines his fintech engineering background with real-world money management experience to create financial content you can actually use. Connect with him on LinkedIn.