What Are Sinking Funds?
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Reading Time: 4 minutesSinking funds are a term used for savings accounts that are really not meant to accumulate any large balance. These accounts are an important of your money management, and actually help you stick to a budget. I’ll show what I mean.
How Sinking Funds Work
This account is meant to go to zero. It’s not a problem, that’s what it’s for. The intent is to have money available for SPENDING! You already allocate the rest of your paycheck via a budge to your living essentials, so set aside some that allows you to SPEND without always feeling so restricted. Remember, a budget gives you permission to spend, it doesn’t mean that you should never spend money!
As part of your budget, you should have a set amount with each paycheck to go into your sinking fund. Just keep consistently contributing to it and allow yourself to use to upgrade some things maybe you’ve put off for a while because you were trying to pay off debt or build your true emergency fund.
How Much You Should Keep In There
If you’ve read my money management post, you’ll notice that I refer to a sinking fund as “short-term savings account” because I use it more like a mini emergency fund. My rule is to aim for 3-6 month’s worth of expenses in there as a short-term savings for large ticket items like a couch when you see a good deal, or a new mattress because it’s time.
Some suggest- like Project Financially Free- actually setting a limit on your sinking funds account, but it’s totally up to you!
I’ll admit that I don’t have that much in my own short-term savings right now because we’ve made a couple of large purchases really close together. I decided I’m going to do some product reviews on those purchases, too, since I believe that a part of personal finance is understanding value vs. what’s the least expensive. Some things are worth paying the money. Stay tuned for those!
These savings accounts are for those things that aren’t a part of your regular budget, or wouldn’t qualify as an emergency; the things you want and not necessarily need.
For instance, I may want a nicer desk for an official office space. While it’s kind of a need, I could still get away with just using the table. With the short-term savings account though, I just make sure I have enough money in there to purchase what I want, and then give myself permission to go do it!
The Trick Is To Have Multiple Short-term Savings Accounts
You’ll want to have more than one of these types of accounts. I currently have two, but thinking of adding a third.
One of my accounts is for the miscellaneous big ticket items like what I’ve already mentioned.
My second account is strictly a vacation fund. Did you know that a whopping 55% of the country doesn’t use all their paid vacation? Maybe because they aren’t saving up for it. I know that because I have a completely separate account for just vacation money, I’m not constantly using that money on other things and never actually taking a vacation!
I contribute the same amount to each account every paycheck.
The third one I’m thinking of starting I would call a car sinking fund. I would start contributing a consistent amount every paycheck, just like I do with the other ones, for any future car purchases or car repairs. I would include car repairs with this account since I already have a fully funded emergency fund. If I start growing this car savings account, I won’t have to tap my emergency fund for any car repairs!
Find The Right Bank
If you’ve seen my post about saving money, you’ll know that I recommend keep emergency funds in a hard-to-get-to place. The same goes for at least some of your short-term savings.
I keep at least one short-term savings in the same place as my regular checking account. Again, it’s for miscellaneous little items so I want to be able to access it easily. If you’re using it more than six times a month, however, it’s not really a savings account. Your bank will tell you that, too.
However, things like the vacation sinking fund, or a car sinking fund, probably should be in a place that you can’t access quite so quickly. I like using CIT Bank to hide money from myself (ha ha!), but you should check out SuperMoney, too, to compare account options from other banks.
Closing Thoughts
These short-term savings accounts, or “sinking funds”, really do help you live a fulfilling lifestyle while still living on a budget. So allow yourself to have some fun, dream about what you want to spend your money on, then start an account to save up for it!
What would be the first thing you start saving up for?
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47 Comments
Gurpinder
Approx 4 yrs ago I opened my second account and disable NetBanking, cancelled ATM card, and started saving and it’s awesome, it pays.
Ashley
You went all in! Good for you!
Alice
I really never heard of this before. Thank you for valuable information.
Keirsten
It’s interesting that so many ppl consider budgeting as meaning only saving and never spending. But budgeting can mean whatever you want it to mean so long as you’re allocating your money to these areas. I’m going to share this with my not so money conscious friend of mine, haha. Thanks for sharing.
Tammy Horvath
I take all of my paid vacations and would like to take everyone else’s vacation that they don’t take. Sinking funds sounds like a good way to save for something, which I am already doing. I have a sinking funds vacation account.
Sabrina Anthony
Funny, I always had these short-term accounts i.e. Christmas club, Vacation Clubs but had no idea they were called sinking fund accounts until I Google it. LOL Thanks for sharing.
Megan
I haven’t heard of the name/concept of sinking fund before, but I love it! What a great idea to be able to spend money already set aside…for spending! I’d have a lot less guilt over purchasing things!
Marianne
I have never heard of sinking funds before… will have to research a little more on it!
Barbara
Great information! Thanks for sharing!
Ashley
Thank you for reading!
lisa Manderino
I like having a vacation fund. It is a great idea!
Ashley
Then you know you ALWAYS have vacation money!
Chelsea
After finishing Financial Peace University a few years ago, and then paying off debt, and building our emergency fund, we started putting a specific amount of money aside each month in sinking funds. Reason being, things like our earthquake insurance would come up every 6 months and we couldn’t afford it so more stuff would go on the credit card. Instead, I divide the amount due over 6 months, and every month put that in the same account as my emergency fund is in. But I keep running, monthly totals of each sinking fund and the emergency fund in there. But it’s been such a relief come payment time, because I have it all stashed away and just pay it from that account. The other sinking fund we started was for Christmas and summer vacation. Christmas was SO much less stressful this year with a sinking fund!
Ashley
You’ve got it figured out. I’m the same way with my insurance and property taxes… they’re my least favorite sinking funds, but necessary.
Alice
I’ve never heard of this before but it makes sense. Thanks
Alexis Farmer
I had never heard of sinking funds until this but it makes perfect sense to have them. My concept of budgeting is all off! Haha.
Ashley
Ha ha, well, I hope it helps!
Sandi
Interesting, I have never heard this term. Updated rainy day fund?
Ashley
Kind of… it is separate from you emergency fund, though, which is what I would call a rainy day fund. These are funday funds!
Tiffany
We started doing this 2 years ago and I had no clue it had a name! We have an account that any extra side gig money goes into that we use for house upgrades/decor and trips. Looking to maybe open up an extra account to separate the two.
Ashley
I know Ally lets you separate your money into “buckets” within a single account, which is nice.
Sydney Delong-Eat Simply Sweet
Great writing, Ive never thought of a sinking fund, but should get a couple set up!
Ashley
They give you permission to spend, that’s the best part! Thank you for reading.
Faye
I’m not in a place to do this at the moment, but I’m looking forward to the time where I will have a Sinking fund for my home, appliences and car
Ashley
They do give you something to look forward to, which I think is a healthy way to manage your money.
Danielle Ardizzone
Never heard this term before, but it sounds very do-able!
Larissa
Hm. What a n interesting reading. Never ever heard about sinking account. I used to live paycheck to paycheck but my husband is a financial guru and stewards all our finances pretty well but even he never mentioned sinking accounts… Very interesting. Thank you for sharing:)
Ashley
Maybe he has one for you guys and you don’t know it yet. You should ask him. 😉
Debbie
Interesting concept in the process of managing your money!
Kristin
Sounds like the most fun savings account to build. 🙂
Ashley
Oh, it is!
Jill DeMasi
I am working towards building my savings account since I just recently was able to pay all my debt off!
Ashley
Wow, yay for you! I went through that same journey. Most of the new savings went to an emergency fund, but I still had to budget some money for those “other things” that come up.
Kendra
What a great way to manage money and have a positive relationship with spending. Awesome post!
Ashley
Thank you!
Whitney Woodley
Wow sinking funds? I’ve never heard of this! I actually learned a lot from your article & I appreciate you sharing this with me.
Ashley
Yay, I’m so glad! I hope you’ll find it useful.
Carolyn
We’re currently saving for a Disney vacation but instead of putting cash away, we’re purchasing gift cards to be used on the trip. I have a Target redcard so I end up paying a little less than face value, so it’s a double-win!
Ashley
Wow! I love those kinds of stories! I think living on a budget makes people creative, that’s for sure!
Jason Gowin
I’d love to take part in something like this (I’d never heard the term before this article), but with Covid having hit our household finances, we are trying to figure out our next steps in moving forward through this uncertain time. Great information though for brighter days.
Ashley
Glad you learned something new! Just another tool for budgeting. I happened to quit my job at the same time as COVID hit, ironically, so we’re also still adjusting to the new income. You’ll get there!
Melissa Jones
Interesting concept
Cindy Moore
And now I know what a sinking fund is! I have one for vacations.
Tiffany
I love this name – sinking fund! I never heard of it and and kinda do something similar, but without the name just turns into extra cash I spend it. But with a focus – I might just have it all ready for when things do pop up!
Maya
Valuable info!
Dan
I love the idea of the ‘big ticket’ household fund, it’s always something that we’re worried will get away from us if we don’t keep an eye on it. Took it a step further to split into two funds, one for sub $100 and one for over.
Although we do wish the 3-6 months of expenses was earning more than 1.2% interest!
Ashley
No kidding!