Your car registration comes due. Holiday gifts season arrives. Your insurance is due. These aren't emergencies—they're predictable. Yet many people scramble to cover them every time.
Sinking funds solve this problem.
What Is a ?
A sinking fund is money you set aside monthly for a planned future expense. Instead of paying $600 for car insurance all at once, you save $50/month so the money is ready when the bill arrives.
Unlike your (for true surprises), sinking funds are for things you know are coming.
Sinking Funds vs. Emergency Fund
| Sinking Fund | [[Emergency Fund]] | |
|---|---|---|
| Purpose | Known future expenses | Unexpected emergencies |
| Examples | Car registration, gifts, vacation | Job loss, medical emergency |
| Timing | You know when it's needed | Unpredictable |
| Amount | Based on specific expense | 3-6 months of expenses |
Common Sinking Fund Categories
Annual expenses:
- Car registration and maintenance
- Insurance premiums (if paid annually)
- Holiday gifts
- Vacation
- Back-to-school expenses
- Property taxes
Irregular expenses:
- Car repairs
- Home maintenance
- Medical expenses
- Pet care
- Clothing replacement
Goals:
- New furniture
- Electronics
- Wedding costs
- savings
How to Set Up Sinking Funds
Step 1: List predictable expenses
Think through the year. What expenses came up that felt "unexpected" but really weren't?
Step 2: Calculate monthly amounts
Annual expense: Divide by 12
- $600 car insurance ÷ 12 = $50/month
Irregular expense: Estimate annual cost, divide by 12
- Car repairs: ~$1,200/year ÷ 12 = $100/month
Step 3: Decide where to keep them
Option A: One with mental tracking Keep one account, track categories in a spreadsheet
Option B: Multiple savings accounts Many online banks let you create multiple "buckets" or sub-accounts
Option C: Envelope system Physical cash in labeled envelopes (old school but effective)
Step 4: Automate transfers
Set up automatic transfers right after each payday. What you don't see, you don't spend.
Sample Sinking Fund Setup
| Category | Annual Cost | Monthly Savings |
|---|---|---|
| Car maintenance | $1,200 | $100 |
| Car registration | $200 | $17 |
| Holiday gifts | $600 | $50 |
| Vacation | $2,400 | $200 |
| Home repairs | $1,000 | $83 |
| Medical | $600 | $50 |
| Total | $6,000 | $500 |
$500/month sounds like a lot until you realize you're paying these expenses anyway—just painfully, all at once.
The Psychology of Sinking Funds
When December arrives and you have $600 saved for gifts, you feel in control. When a car repair hits and the money is there, it's an inconvenience, not a crisis.
This shift—from reactive to proactive—reduces financial stress significantly.
Getting Started
If $500/month feels overwhelming, start smaller:
- Pick your 2-3 most stressful "surprise" expenses
- Calculate the monthly amount
- Set up automatic transfers
- Add more categories over time
Even one sinking fund for one expense changes how you experience that bill.
Common Mistakes
Starting too big: You don't need 10 sinking funds on day one. Start with 2-3.
Raiding the funds: That vacation fund isn't for "I want new shoes." Stay disciplined.
Forgetting to replenish: After using a sinking fund, start building it back up.
Being too precise: Round up. $17/month → $20/month. Buffer is good.
The Bottom Line
Most financial "emergencies" aren't emergencies at all—they're expenses you could have predicted. Sinking funds turn financial chaos into financial calm.