Big, one-time or infrequent expenses — a Disney vacation, new Apple Watch or next year's car insurance premiums can be budget busters. Because these expenses don't occur regularly, you may struggle to fit them into your monthly budget.
While it's easy to put big expenses on credit cards or payment plans, making a habit of it can lead to serious financial problems.
That's where sinking funds can come in handy. Here's how this savings method can help you prepare for special purchases and infrequent expenses.
What is a sinking fund?
Sinking funds are money set aside for specific savings goals, whether it's infrequent bills or a large one-time expense. Having a sinking fund can keep you from withdrawing money from your emergency fund, your retirement accounts or going into debt.
You can use a budgeting app, like You Need a Budget (YNAB) or PocketGuard, to monitor your sinking funds. Setting up automatic monthly transfers from your main checking account to your sinking funds account can help you stay on track.
You Need a Budget (YNAB)
Cost
34-day free trial then $109 per year ($9.08 per month) or $14.99 per month (college students who provide proof of enrollment get 12 months free)
Standout features
Instead of using traditional budgeting buckets, users allocate every dollar they earn to something (known as the "zero-based budgeting system" where no dollar is unaccounted for). Every dollar is assigned a "job," whether it's to go toward bills, savings, investments, etc.
Categorizes your expenses
No
Links to accounts
Yes, bank and credit cards
Availability
Offered in both the App Store (for iOS) and on Google Play (for Android)
Security features
Encrypted data, accredited data centers, third-party audits and more
Terms apply.
The amount you deposit in your sinking funds is up to you. Plan to spend $1,200 on a vacation next year? Then you'll add $100 per month to a sinking fund. Want to set aside 1% of your home's value for maintenance and repairs? On a house valued at $400,000, that's $333 per month.
If one sinking fund has a shortfall for an expense, you can always withdraw from another fund to avoid going into debt. If you need $500 for car repairs but your repair fund only has $300, you can take $200 from your down payment sinking fund to cover the difference. But if you find your funds are consistently short, though, you need to adjust how much you're setting aside each month.
You can have sinking funds for infrequent bills, like car insurance, or for big one-time expenses, like a wedding. Predictable expenses that you pay monthly, like rent and utilities, should remain part of your monthly budget.
Some examples of sinking funds could include:
- Gifts
- Vacations
- A new car
- Home maintenance
- Insurance payments
- Car maintenance
- Pet care
- New appliances
- Wedding
- Down payment
Your sinking funds can change over time as you accomplish your savings goals.
Sinking funds vs. emergency funds
While they may seem similar, a sinking fund and an emergency fund are quite different
An emergency fund is for unexpected costs, like a medical emergency or a surprise car repair. If you're laid off or your income stream is otherwise disrupted, you can tap your emergency fund to cover mortgage payments and other expected costs.
The difference with a sinking fund is that it's for something you're anticipating, whether that's a vacation, a kitchen remodel or even college tuition.
Because you never know when you'll need to access your emergency fund, the money needs to be readily available. Typically, that means putting the money in a high-yield savings account, so it's earning interest but can still be withdrawn without too much trouble.
With a sinking fund, there's more predictability and less need for quick access. If you're opening a sinking fund in January for your Christmas shopping, you can lock the funds away in a six-month CD.
Where to keep a sinking fund
You want your sinking funds to earn as much interest as possible while remaining somewhat accessible. A checking account is a bad idea because there's little or no return and a strong temptation to spend the money on other things. Keeping your sinking funds in an investment account is also ill-advised, as your investments really should be untouched for years.
A high-yield savings account (HYSA) is a good option for a sinking fund because you can keep adding to it, and even set up automatic deposits from your paycheck. (With many online banks, you can set up multiple accounts and nickname each one based on your goals. )
When you need the money, the transfer may take a few days to complete, so plan ahead.
If you have a goal with a longer timeline, like a wedding or a down payment on a house, you could also use a CD for your sinking fund. Your money will be tied up for months or even years, and you typically can't touch the funds before maturity without incurring a penalty (which can be a good thing).
With an add-on CD, you can make deposits even after your account is opened.
Shop for a CD
Is a sinking fund a good idea?
You could have just one big checking account and pull from it for infrequent expenses without tracking. But, for many people, strategically saving for named goals makes it easier to budget and prevent unnecessary debt.
Be careful not to have too many sinking funds or you'll spread yourself too thin. Managing multiple savings goals can be a challenge. How much you can set aside depends on your budget and priorities.
Sinking fund FAQs
What is a sinking fund?
A sinking fund is a dedicated savings account for a specific, planned expense, like a wedding, vacation, home renovation or new car. Typically, these are medium- to long-range goals.
Where's the best place to open a sinking fund?
A high-yield savings account (HYSA) is an easy and accessible place to open a sinking fund, because the money will earn interest, but you can keep making deposits. HYSAs are more common at online banks, which may offer "buckets" to divide funds into multiple sinking funds. If your goal is far enough away, and you have a decent amount already saved, a CD might be a great option. The penalty for early withdrawal can help us fight the temptation to use the money on non-essentials.
What's the main drawback of a sinking fund?
The main drawback of a sinking fund is the risk of spreading yourself too thin with too many funds. They also require a fair amount of discipline to ensure you won't dip into the fund for unrelated spending.
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