Sinking Funds

One of the key tools I use to stay financially organized is sinking funds. If you’re unfamiliar with the term, a sinking fund is a dedicated savings category where you put money aside from every paycheck for a specific purpose. The idea is simple: instead of scrambling to cover an unexpected expense, you’re already prepared because you’ve been saving gradually.

For example, one of my sinking funds is for gifts. Throughout the year, I know I’ll be buying gifts for birthdays, anniversaries, thank yous, get-well-soons, and other occasions. To stay ahead of these expenses, I set aside $50 from every paycheck into my gifts fund. That way, I can pull from it whenever needed, and it doesn’t throw off my monthly budget.

Now, you can manage your sinking funds however it works best for you. Some people like to open separate bank accounts for each category, but I keep things simple by tracking everything in a spreadsheet. All my sinking funds are listed there, but the money is held in one high-yield savings account. Here’s a breakdown of the sinking funds I use throughout the year:

1. Gifts

As I mentioned, this sinking fund is for all the gifts I purchase throughout the year. It’s separate from my holiday-specific fund, and it helps me manage expenses for birthdays, anniversaries, and other occasions.

2. Christmas

Even though this technically falls under “gifts,” I separate it out as its own fund. I plan ahead for holiday spending so I can stay on budget during the busiest (and often most expensive) time of the year. I wrote a separate article on how I manage holiday spending if you want to dive deeper into that topic.

3. Car Fund

My husband and I have paid off both our cars, but they’re getting older. We know that eventually, we’ll need to replace one or both, so we’ve been setting money aside to pay cash for our next car. In the meantime, we also pull from this fund for repairs and maintenance as needed.

4. Home Repairs and Maintenance

This sinking fund covers unexpected expenses related to our home, like when the plumbing needs fixing, the AC breaks down, or a light fixture needs professional help. Having this fund ensures we’re not caught off guard by home repairs.

5. Vacation Fund

Even when we don’t have a specific trip in mind, we still contribute to our vacation fund regularly. That way, when an opportunity for a getaway arises, we already have the money set aside. Once we do plan a vacation, this fund helps set a clear budget for the trip—whatever’s in the account is what we can spend.

6. Dreams

This is a fun one! I follow a zero-based budget, meaning every dollar has a job. If I have a little leftover at the end of my budgeting process (usually between $1 to $10), I put it into my dreams fund. This fund is for those big, long-term goals that aren’t immediate priorities but are exciting to plan for—things like a down payment on a new house, a hot tub for the backyard, or finishing the basement. Over the past two years, I’ve saved over $1,000 in this category, ready to be used when the time comes.

Making Sinking Funds Work for You

These are just examples of the sinking funds I use, but remember, budgeting is personal. Tailor your sinking funds to what makes sense for your life and financial goals. Whether it's saving for gifts, vacations, or future dreams, sinking funds can help you stay organized and prepared year-round.

Start small, be consistent, and watch your funds grow.