What is a sinking fund? Guide to purpose-driven saving

Budgeting is a well-known way to manage your personal finances. Unfortunately, known but irregular expenses can easily bust your budget. That’s where sinking funds come in. We all face nonrecurring costs that require extra resources we don’t account for when planning our budget, such as auto insurance premiums or holiday gifts. Using a credit card to cover the expense is possible, but without proper planning, it can lead to financial struggles.  A sinking fund is a strategy for setting aside money in advance for planned but irregular expenses.  

This guide explains what a sinking fund is, what it is used for, and how it can be a useful tool for managing your finances. 

What is a sinking fund? 

A sinking fund is money set aside in advance for a specific, planned expense that does not occur regularly. It is not a type of financial product, but rather a savings strategy defined by its purpose. While many people use a separate bank account for this purpose, a sinking fund is specifically for the purpose of saving money to pay for an irregular, but planned expense. For example, many Americans pay for auto insurance premiums semi-annually to save money on their bill.  

Let’s say your semi-annual premium is $1,200. Coming up with such a large amount at once may be difficult. Rather than scrambling at the last minute to come up with the $1,200, you save $200 monthly to cover the expense when it comes due. That is just one example of a sinking fund. In practice, you can use sinking funds for any predictable, periodic cost, from travel and holiday gifts to home maintenance and insurance premiums. 

Sinking funds originated in corporate finance, where firms used them to repay bonds. In personal finance, sinking funds are simply structured savings plans. 

What is the purpose of a sinking fund? 

The purpose of a sinking fund is to reduce financial stress and avoid credit card debt by preparing in advance to manage irregular expenses. Sinking funds help people smooth out expenses they know will occur but don’t require a monthly payment. 

Shopping for holidays is a good example of the purpose of sinking funds. The average person planned to spend nearly $900 on gifts and other seasonal items during the 2025 holiday season, according to the National Retail Federation (NRF). 

Putting that amount on a credit card or taking a personal loan for it, while possible, can lead to burdensome debt. Saving money each month to cover that expense provides the peace of mind to manage your finances confidently. Additionally, it helps you avoid busting your budget by turning a large, infrequent expense into smaller, more predictable ones, all to avoid debt. Sinking funds replace reactive borrowing with proactive planning.  

What is the difference between a sinking fund and other savings accounts? 

It is common to confuse sinking funds with other savings-related accounts. Emergency funds are one commonly confused example. While both are fantastic resources to manage your personal finances, they serve different purposes. 

The main difference is that a sinking fund is goal-specific, while emergency savings or other savings accounts usually serve a broader purpose.  

Here’s how sinking funds differ from other savings accounts. 

Sinking fund vs. emergency fund 

Although both are valuable resources for managing your savings needs, the key difference between a sinking fund vs. emergency fund is predictability. An emergency fund covers unexpected expenses, while a sinking fund covers expected but irregular expenses. 

An emergency fund is money you set aside for unexpected expenses. Losing your job, having your basement flood, or needing a major repair to your air conditioner are all good examples of what an emergency fund should cover.  

Sinking fund accounts are used to manage expenses you expect, but that occur irregularly. 

The two key differences are timing and predictability. You can’t predict your basement will flood, but you know when you will need to pay for the next auto insurance payment or purchase birthday gifts for your family members. 

When comparing a sinking fund vs. an emergency fund, they share one powerful trait: debt avoidance. Both are complementary tools that work together to help you avoid incurring debt. 

Sinking fund vs. regular savings account 

A savings account is simply a vehicle where you store your money. It is where you put your money to grow wealth, plan for emergencies, and save generally without one specific goal in mind.  

A sinking fund, by contrast, is goal-specific; it’s an account that’s dedicated to achieving a specific objective. Think of sinking funds as buckets for storing savings for your occasional, known expenses. 

Most banks allow Americans to open multiple savings accounts for different purposes. You can have one general savings account for extra cash in the event of a quick, small emergency, and multiple sinking fund accounts to manage various planned expenses. Budgeting apps like YNAB and Monarch Money help you monitor multiple accounts, making money management easier. 

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How to set up a sinking fund 

Setting up a sinking fund involves three main steps: identifying your goal, choosing where to keep the money, and creating a funding plan. 

Creating a sinking fund account is a straightforward process. You must identify what you need to save for, where to keep the funds, and the type of account you want, which is typically a savings account. It’s best to have a plan when setting up a sinking fund, as consistency in saving is key to achieving your goal. 

You can set up as many sinking fund accounts as you want, but it’s wise to start with only a few to avoid overwhelming yourself. As saving with sinking accounts becomes more comfortable for you, you can always add more to further optimize your efforts. Here’s how to create your first sinking fund. 

Identify your savings goals 

It’s possible to create a sinking fund for virtually any irregular expense or goal you have. For instance, if you have a large expense coming up, like a vacation or home upgrade, you can start a sinking fund account to pay for it. The same is true for expenses like insurance payments or home maintenance. 

These are some common examples of sinking funds you may want to create: 

• Car maintenance 

• Auto insurance 

• Travel costs 

• Wedding expenses 

• Car or new home down payments 

• Gifts 

• Home remodeling 

• School books and supplies 

• Birthday parties 

• Veterinary bills 

• Clothing purchases 

You can start a sinking fund for any need that’s not part of your monthly budget. It’s best to start with the most urgent or most affordable needs, then expand from there. 

Choose where to keep your sinking fund 

A sinking fund is typically held in a high-yield savings account or money market account to keep your funds accessible while earning interest. 

It is best to keep your sinking funds separate from your checking account. Keeping them in checking may seem convenient, but it makes it easier to spend them by mistake. 

A savings account or money market account is typically best for sinking funds, and both offer higher interest-earning opportunities than a standard savings account at your local bank. 

High-yield savings accounts are often the best option for earning interest. You may need to use a separate bank, often an online option, but you can generally transfer funds to your checking account within one business day. Some banks may even allow you to create subaccounts, so you don’t have to open a separate savings account for each need. 

Money market accounts commonly pay a competitive interest rate, though lower than high-yield savings accounts. While money market accounts typically offer check-writing features, many limit the amount you can use each month. High-yield savings may also have monthly withdrawal limits, but when managed wisely, you can stay within the limit without sacrificing the extra interest compared to a money market. 

An investment account may seem like a lucrative option for sinking funds, but market values fluctuate, and you may incur taxes if you sell investments at a gain. Because sinking funds are meant for planned expenses, stability is usually more important than growth. 

Create a funding plan 

Choosing an account type for your sinking funds is only part of the process. You must establish a funding plan to begin saving for your specific goal. Identifying how much you must save each month is key to starting your funding plan. 

To determine your monthly contribution, divide the total expected expense by the number of months until the expense is due. 

For example, if you plan to spend $1,500 on holiday shopping and it’s early January, divide $1,500 by 12. That equals $125 per month. Stashing $125 in your holiday sinking fund each month will allow you to make purchases confidently without relying on credit.  

You can do this manually, but creating automatic transfers is best to ensure consistency and make managing sinking funds easier over time. 

What are the best sinking fund tips for success? 

Sinking funds give your savings a purpose, but it may take some streamlining to optimize your processes. Following a few sinking fund tips can help ensure your efforts stay organized and consistent. 

To build successful sinking funds, consider these best practices: 

• Keep the funds organized and clearly labeled so you know what each sinking fund is for 

• Automate deposits so you don’t forget to save 

• Review and adjust as necessary, especially if goals change 

• Avoid dipping into sinking funds for unrelated spending 

• Maximize interest-earning opportunities 

• Track progress visually to stay motivated 

Frequently asked questions about sinking funds

Final thoughts: What is a sinking fund, and why does it matter? 

Many expenses in life are inevitable, but they don’t always occur weekly or monthly. Such costs can create stress, especially if you don’t have a plan for them in your budget.  

A sinking fund is a practical way to prepare for certain types of expenses without relying on credit. By setting aside money gradually, you reduce financial pressure, avoid debt, and gain greater control over your cash flow.  

By planning for what lies ahead, you take control of your money, not the other way around.