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How To Manage Your Finances With Sinking Funds

sinking fundsIf you’re on a personal finance journey, you’ve most likely run into the dreaded Murphy’s law. You know the one I’m talking about… “Whatever can go wrong, will”. When we’re trying to pay off debt, save a significant amount of money, or even just trying to get ahead, something always seems to go wrong. And sometimes, our emergency fund or credit cards just can’t cover it. And that’s where sinking funds come in.

How to Manage Your Finances With Sinking Funds

It’s time to learn to manage your money better. It’s time to learn about sinking funds. They’re simple, and thankfully they’re life-savers!

What Are Sinking Funds?

By definition, a sinking fund is money saved for a specific event or expense. In other words, a sinking fund is something that you save for one purpose. This could be Christmas gifts. Or maybe pre-school payments. But whatever it is, it doesn’t fall under the general category of “emergency”. So, you’re saving money in preparation for something to go wrong, or, for something to happen in the future.

I’m sure you’re asking “Isn’t that a little negative and lack mindset thinking?”. Sure, I can see why you would feel that way. But let’s think about it this way. No one goes into a marriage expecting to get divorced. And yet, the average percentage of divorces in the U.S. has been about 50% for years. And guess what? Divorce is expensive. And, if you didn’t have a prenup, you could potentially be cleared out of your life savings.

Now, imagine getting a prenup BEFORE getting married. Is it unsexy and a little negative? Maybe. But, that piece of paper can save your finances should things go south.

  • Hope for the best…
  • Prepare for the worst.

That’s exactly what sinking funds are. Their basically a prenup with your money and expenses.

Related: The Dumbest Financial Move? The Car Payment

How Do They Work?

Sinking funds work differently depending on who is implementing them. For example, I have sinking funds for both positive things in my budget (ie. vacations, self-care, clothing, etc), and not so positive things (ie. car maintenance and repairs, moving costs, and medical bills).

Sinking funds can be whatever you want to save for.

  • Do you always overspend on gifts? Start a sinking fund for them.
  • Does your car break down every single time you finally save up your emergency fund? Start a sinking fund for it.

Here’s a quick breakdown of some of my sinking funds:

1) Vacations: $150/mo.

We go on two vacations a year, one that we can drive to and one that *may* be out of the country or something that we would need airplane tickets. It may not seem like a lot, but we also do credit card churning, and take advantage of deals online.

2) Medical Expenses: $350/mo.

One of our biggest sinking funds! We use a healthcare ministry, so all of our checkups are out of pocket, and we do have a $1,000 deduction. So this savings comes in handy!

3) Homeschooling: $50/mo.

That is for supplies, co-ops, and online learning. We typically buy most of these things at one time.

4) Car Maintenance, Repairs, Savings: $150/mo.

We are saving for another car in cash, but we won’t need one for a while (our car is only 6 years old and we never really drive it). However, we also save for repairs, insurance costs, and maintenance costs with this money every month. That way, when we get hit with our yearly registration bill, or if a taillight goes out, we don’t have to dip into our regular savings.

5) Gifts: $50/mo.

We have a fairly large-sized family, including kids, so we often buy gifts throughout the year as well as for Christmas. $50 a month has worked well for us, but we may up this as the kids get older and as more additions are added to the family.

6) Holidays: $50/mo.

Yes, this is a separate expense, for good reason! We typically host Thanksgiving and Christmas. And when we don’t, we still chip in for food, decor, and hosting. So, we need to make sure we are prepared to cover these costs, separate from our gifts budget.

7) Misc Individual Sinking Funds: $150/mo.

Each person in our family gets $50/mo to save or spend. This could be for personal items, self-care, or just to save up for a new toy or gadget. We don’t always spend our $50, so sometimes it just sits in its envelope until it’s ready to be used. For our daughter, my husband and I automatically get $25 in one-dollar bills and let our daughter stuff her piggy banks. She’s a saver by nature, so this is fun for her!

save money on a tight budgetYours May Not Look The Same

You may be looking at my sinking funds and think “Well I don’t homeschool or host holidays, so this won’t work for me!”. But that’s not true. Sinking funds are different for anyone who uses them, so it’s important to start off with ones that you know you’ll need.

For example… 

  • A friend of mine saves money in a sinking fund for her yearly subscriptions and pays them all at once upfront. That includes her Netflix, Hulu, Amazon Prime, and other subscriptions that she has. I don’t really have any of those, so it doesn’t make sense for me to have a sinking fund for them.
  • Another friend of mine has a sinking fund for her pets and her small homestead. Super smart on her part!

Anyone can get into sinking funds. The key is to choose the ones that work best for you. And also, you can start small. If you don’t think you need to save $350 a month for medical bills because you have great insurance and never go to the doctor, that’s okay. If you only have $100 to start saving in sinking funds, go for it.

Knowing what you’re saving for (and actively preparing for it) is a super smart financial decision and can keep you from having to dip into your emergency fund every single time something pops up. And that is the true beauty of sinking funds.

Are you ready to get started with your sinking funds? Why or why not?

Grow Rich Money

AUTHOR Kimberly Studdard

Kim Studdard is a project manager for online entrepreneurs and small businesses. When she isn't spending time with her daughter and husband, or reading her growing pile of horror books, you'll find her working on her HR degree and working towards FIRE.


  1. I have been using sinking funds every since my Dave Ramsey class 12 years ago!! Only way to live!! I have 12 different savings acct that I deposit into every 2 weeks. Never have to pull money out of emergency fund…..

    • Dang, you’re hardcore! I just pile money into one account. You’ve got 12!!! Nice work.

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