Sinking Funds: What are they and why you NEED them RIGHT NOW

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Sinking funds is a term that can be a little confusing. Here is a complete guide to making sure you know what you are doing and help you really get your budget together!Have you ever known that you have a big expense coming up, but decided to figure it out when you get there? Does Christmas “surprise” you ever year, even though it is ALWAYS on December 25th? Do your January credit card bills make you a little bit of a scrooge?

I have been posting on Instagram about my sinking funds lately and a lot of people have questioned what I mean when I use that term. I think the name came from Dave Ramsey, but let’s face it, our grandparents and great grandparents really invented the wheel when it comes to no debt finances. Grandma knew what it meant to save her money for a rainy day.

I started my debt free journey on January 1st, 2017 and I have not had to pull money out of my emergency fund once because I have my sinking funds. They are a little confusing, but hopefully this guide will help you get started.

Here are the most commonly asked questions I get about my sinking funds:

How does it work?

A sinking fund is a type of savings for irregular or yearly expenses. For example, you pay $600 every 6 months for car insurance. Instead of ignoring it and waiting until the time comes up to pay for it, a sinking fund sets aside a portion of the payment every single month. In this case, it would be $100 a month.

It may feel like you are putting away a lot every month, but I promise that it will save you tons in the long run! When you start getting the hang of looking at sinking funds as an expense, it becomes a lot easier to put money away every single month!

What categories do I need sinking funds for?

If you own a house, this might be a little overwhelming. There are so many things that cost money inside a house that could need replaced. You might just want to create an overall “House” sinking fund. Things might include appliances, plumbing, roof, and paint. There are a million things inside a home that are expensive. Help figure out what you need to replace in the next year or two. This will help you get started without overwhelming you.

Other things outside of a house include car maintenance or a new car, clothing, Christmas/other holidays, and vacations. You can get your very own list of budget categories spreadsheet that has 70+ categories for FREE by signing up at the bottom of this post!

Every month I set aside $50 for Christmas. It may not seem like a lot monthly, but by the time Christmas rolls around, I have almost $600. Can you imagine what would happen if before Christmas season even started, to have $600 extra dollars for gifts and holiday parties. What does that do to your December budget? Most importantly, what does that do to your January credit cards?

I try not to itemize it too much because I could probably have 100 different envelopes for different things. Think of purchases that always throw you off when they come around. Back to school shopping, Christmas, your laptop may need replaced every 5-8 years, a different vehicle every 6? It really comes down to what works for you and your family.

How much do I need to put in each sinking fund?

For this, estimate how much on each one is going to cost and how often you need to make the purchase. For example, I buy contacts once a year for $120, plus $40 for the eye appointment that I put money away for every single month. The total cost when I go in is $160, but it is only once per year. I put $14 in an envelope every month and I never have to worry about the upcoming cost.

The easiest way to figure it out is to estimate how often you spend money on each categories. Do you buy new clothes at the change of every season (4 times a year/ every 3 months) and how much do you spend each time. If you spend $100 every 3 months on clothes. you should put aside $34 a month for clothes! TOO simple.

It also doesn’t have to be the same amount every single month. If I sell some of my clothes, I will put the money from the sales in my clothing envelope.

Where do I keep the money?

There are multiple ways of storing money. I do a combination of all three of them, but the longer you use the process, the more you will figure out what works for you. I use a combination of Cash envelopes, multiple bank accounts, and one savings account.

Cash Envelopes

I personally just have envelopes in my desk drawer that I fill the designated amount every month. I keep them all in my home, but I am looking at doing the next option for a few of my bigger items. I’m slowly starting to put away money for a house and a new (to me) car, so these will definitely be in a bank account where they can earn some interest!

Cash envelopes are things that you pay for pretty regularly, but not monthly. Things that I use my physical envelopes for are pedicures (I probably get every other month), clothes, contacts, and entertainment. If I know that I need new work shoes, I might put a few extra dollars in my clothing fund for a few pay days coming up to getting new work shoes.

Multiple Bank Accounts

You can also set up multiple bank accounts for bigger expenses and label them with what you need them for. Most banks have an app and you should be able to label the bank account on your app. Do your research to see where the best interest is! There are online bank accounts out there that will pay you at least .75% interest on your money, which may not seem like a lot, but it is a lot better than .01% which is the average “hometown” bank account. Looking into some online only banks can pay huge difference in interest than your small town bank! It might be worth looking into.

I recently set up at Capitol One 360 Savings Account that I set up to automatically put aside money each month! This way I don’t even notice that I am saving, but I am slowly putting away a little bit for a house! This is specifically for my future house because as soon as I’m debt free, I plan on funding a house, but I can’t seem to wait that long!

One Bank Account

The third option would be to set up one savings account and keep a ledger of how much goes to each sinking fund. This can be difficult if you only see the overall balance instead of the different categories. It is good because it is all in one place and you don’t have to worry about it being everywhere. If you are a super organized person, this one may be for you.

This one used to be for me. I used to have a spreadsheet for all of my sinking funds and how much I had set aside for each one. It worked for paying for my college expenses because this bank account was also linked to my checking. It was for more common expenses like tuition, books, and parking. To this day, I put money in this account for all of the expenses that are due the first day of the following month, which helps me pay all of my bills on the first.

It won’t work if you don’t do it

There are no specific answers for how you have to do it. Make it your own and make it work for you! No matter what you are saving for or how you do it, setting aside money for your sinking funds every month is super important. If you know you have the money for your car insurance, it causes so much less stress. Planning out future expenses allows you to do way more things. For example, say you want to go on vacation in six months. Get a price estimate now, and start setting aside a 1/6 of the vacation budget into a sinking fund. This is the best way to ensure that you aren’t going into more debt because you want to do and buy things. Sinking funds SAVE my budget from irregular purchases!

Setting up sinking funds will help reduce budgeting stress by a TON. I never worry about having to buy things, because even if I don’t have all the money for something, it’s easier to find $30 instead of $300! Make the system work for you, but make sure you are putting away for bigger expenses every month!

Do you still have questions? Don’t be afraid to reach out and ask! 




  1. Excellent advice. We teach a course – and besides emergency fund we help them budget with how much they need every month. I like your “sinking” fund.

    • thesavvysagittarius

      I love my sinking funds because they always prepare me for more expenses in the future, but if the expense is small enough, I just put it into my budget for the month.

  2. Terri S.

    When I saw the term “sinking funds” in one of your other blog posts– I had to investigate further-as I wasn’t sure of what you meant. Actually I started doing this very thing last year & hold that money in a separate saving accounts. It has made life SO much better to know my house insurance, land taxes— ANYTHING like that will be covered. An area I wish I had thought out years ago was a house repairs category. I thought I had that figured out years go but some life events changed the plans. My house has been paid for for several years but some major issues have recently occurred which will require thousands of dollars to repair. I am praying for God to show me the way! He is my provider! Blessings to you!

    • thesavvysagittarius

      I love that you have already been doing it! There are a lot of different names for it, but ultimately putting a little money away for future expenses is the best way to ensure that there are no emergencies later on!

  3. Tumi

    This is super useful. I have three separate accounts, i didn’t know its called ‘sinking funds’. One i call it home renovations, the other is for gifts, December Spending and January backup and the last one is for everything else, that money your give to an uncle you haven’t seen in a while and excited, then buy a bottle of wine or whisky for them..yes i save for those too, because like it or not, they happen and the money has to come from somewhere

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