Sinking Funds: A Beginner's Guide
By FiscallyAI Editorial (AI-assisted) • Updated 2026-02-19 • Educational content
⚡ What Is a Sinking Fund?
A sinking fund is money you set aside each month for a planned future expense. Unlike an emergency fund (for surprises), sinking funds are for things you know are coming: car repairs, holidays, insurance, vacations.
Why Sinking Funds Matter
Without sinking funds, every irregular expense feels like an emergency. Car registration? "Emergency." Christmas gifts? "Emergency." Annual insurance payment? "Emergency."
Sinking funds turn these "emergencies" into planned, stress-free events. You've been saving $50/month for car repairs, so when your car needs $600 of work, you already have the money.
How Sinking Funds Work
- Identify an upcoming expense — Something you'll need to pay for eventually
- Estimate the cost — Your best guess at the total amount
- Set a timeline — When will you need the money?
- Calculate monthly savings — Cost ÷ months = monthly contribution
- Save separately — Keep these funds separate from regular spending money
Example: Car Repairs
- Estimated annual car repairs: $1,200
- Monthly contribution: $1,200 ÷ 12 = $100/month
- Result: You always have money for car repairs
Common Sinking Fund Categories
| Category | Typical Annual Cost | Monthly Savings |
|---|---|---|
| Car Maintenance | $500-$1,500 | $40-$125 |
| Car Insurance (if paid annually) | $800-$2,000 | $65-$165 |
| Holiday Gifts | $500-$1,500 | $40-$125 |
| Vacation | $1,500-$5,000 | $125-$415 |
| Home Maintenance (owners) | $1,000-$3,000 | $85-$250 |
| Pet Expenses | $500-$1,500 | $40-$125 |
| Clothing | $300-$800 | $25-$65 |
| Medical/Dental | $500-$2,000 | $40-$165 |
Sinking Funds vs Emergency Fund
| Sinking Fund | Emergency Fund | |
|---|---|---|
| Purpose | Planned expenses | Unexpected expenses |
| Examples | Car registration, holidays, vacation | Job loss, medical emergency, major repair |
| Amount | Based on specific goal | 3-6 months of expenses |
| Replenished | Yes, continuously | Only after using |
How Many Sinking Funds Should You Have?
Start with 3-5 categories that are most relevant to your life. You don't need a sinking fund for everything — just the expenses that tend to sneak up on you and throw off your budget.
Most common starter sinking funds:
- Car maintenance and repairs
- Holiday gifts
- Vacation
Where to Keep Sinking Funds
- High-yield savings account with "buckets" — Ally Bank and others let you create named sub-accounts
- Separate savings accounts — One account per sinking fund
- Budgeting app categories — YNAB, Monarch, and others support sinking fund tracking
Avoid keeping sinking funds in your checking account — too easy to accidentally spend.
Tips for Success
- Be realistic about amounts — Underestimating defeats the purpose
- Automate contributions — Set up automatic transfers
- Review annually — Adjust amounts based on actual spending
- Don't mix with emergency fund — Keep them separate
- Start small — Even $25/month helps
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Disclaimer: This content is for educational purposes only. Not financial advice. See our full disclaimer.