One of the biggest budget busters isn’t your daily coffee or dining out — it’s irregular expenses. These are the costs that don’t come up every month but still hit your wallet hard when they do. Think holiday gifts, car repairs, annual insurance premiums, or back-to-school shopping.
That’s where a sinking fund comes in. It’s a powerful tool to plan ahead and pay cash for non-monthly expenses — without derailing your budget or going into debt.
Here’s how to set one up and make it work for you.
What Is a Sinking Fund?
A sinking fund is money you set aside over time to pay for a specific future expense. Unlike your emergency fund (which is for the unexpected), sinking funds are for expected but irregular expenses.
You’re essentially “pre-paying” yourself in small amounts so that when the expense arrives, you’re ready.
Examples include:
- Holiday spending
- Car maintenance or registration
- Birthdays and weddings
- Back-to-school supplies
- Home repairs or upgrades
- Travel or vacations
By spreading the cost over multiple months, you avoid large last-minute expenses and stay in control of your finances.
How a Sinking Fund Works
Let’s say you want to spend $600 on holiday gifts in December. If you start saving in January, you’ll need to set aside $50 per month.
That’s your sinking fund contribution — it builds gradually until you hit your target.
You can do this for multiple categories at once, and track each one separately for clarity.
Why Sinking Funds Are Better Than “Winging It”
Most people are surprised by bills that aren’t monthly. That leads to:
- Credit card debt
- Missed payments or late fees
- Stress and panic budgeting
Sinking funds replace surprise with structure. You won’t need to “find” the money later — it’s already waiting.
They also help you:
- Stick to your budget year-round
- Avoid dipping into your emergency fund for planned costs
- Feel confident instead of anxious when irregular expenses pop up
How to Set Up a Sinking Fund Step by Step
Step 1: Identify Your Irregular Expenses
Make a list of anything you know will come up in the next 12 months that isn’t part of your monthly spending.
Examples:
- Car registration: $200/year
- Travel fund: $1,000/year
- Christmas: $500/year
- Kids’ school supplies: $300/year
Step 2: Set a Total Amount and Deadline
Decide how much you’ll need and by when. For instance:
- Need $500 by December → 10 months to save = $50/month
Step 3: Divide the Cost by Months
Take the total and divide it by the number of months until you’ll need it. That’s your monthly sinking fund goal for each category.
You can use a simple spreadsheet or a budgeting app to track this.
Step 4: Open Separate Sub-Accounts (Optional but Helpful)
Many online banks allow you to create “buckets” or “goals” inside a single savings account. Label each one:
- “Vacation Fund”
- “Car Repairs”
- “Holidays 2025”
This helps you stay organized and prevents you from accidentally spending the money.
Step 5: Automate Your Contributions
Set up automatic transfers from your checking account into each sinking fund. Treat them like bills — non-negotiable and consistent.
Even if it’s just $20 a month per fund, it adds up and builds the habit.
How Many Sinking Funds Should You Have?
Start with just a few. Pick the categories that tend to catch you off guard or where you spend the most.
Once you’re confident managing 2–3, you can expand based on your goals. Some people prefer a few broad categories, while others like detailed tracking.
Popular sinking funds include:
- Car maintenance
- Travel
- Holidays
- Medical co-pays
- Pet care
- Technology upgrades
Choose what makes sense for your lifestyle.
Sinking Fund vs. Emergency Fund
It’s easy to confuse the two, but they serve different purposes.
| Fund Type | Purpose | When to Use |
|---|---|---|
| Emergency Fund | Unexpected events (job loss, emergencies) | Only in true emergencies |
| Sinking Fund | Known upcoming costs | Planned, irregular, predictable |
Don’t use your emergency fund for car insurance, holiday shopping, or vacations — that’s what sinking funds are for.
Where to Keep Your Sinking Fund
Your sinking fund should be:
- Safe: Not invested in risky assets
- Accessible: But not too easy to spend impulsively
- Organized: Ideally with labeled categories
Best options include:
- High-yield savings accounts with multiple sub-accounts
- Money market accounts
- Digital banks with goal-setting tools (like Ally, Capital One 360, or SoFi)
Avoid keeping them in cash or checking accounts where the money might get mixed in with regular spending.
Benefits of Sinking Funds
- Reduce financial stress during big seasons like holidays or back-to-school
- Help you stay debt-free and avoid last-minute borrowing
- Make your budget more realistic and flexible
- Build confidence in your financial planning
Most importantly, they turn big financial “surprises” into manageable goals.
Simple Example to Get Started
Let’s say you want to start three sinking funds:
- Car repairs: $600/year → $50/month
- Holiday gifts: $500/year → $42/month
- Vacation: $1,200/year → $100/month
Total monthly savings: $192
Now, when December comes or your car needs new brakes, the money is there — no stress, no credit cards.