How to Build a Sinking Fund
While emergency funds are for the unexpected, sinking funds are your secret weapon for the expected. These accounts help you plan and save for large, recurring, or irregular expenses — without blowing your budget or relying on credit cards. In this detailed guide, you’ll learn exactly how sinking funds work, why they matter, and how to set them up efficiently if you live in the U.S.
What Is a Sinking Fund?
A sinking fund is a savings strategy where you set aside small amounts of money regularly for a specific, planned expense. Unlike an emergency fund, which is for surprise costs, a sinking fund is for known expenses like car insurance renewals, holiday gifts, or home maintenance.
Why Sinking Funds Are a Game-Changer
- They help you avoid debt for planned purchases
- They prevent large bills from ruining your monthly budget
- They give you control and peace of mind
- They align perfectly with goal-oriented saving
Common Types of Sinking Funds
| Category | Examples | Estimated Annual Cost |
|---|---|---|
| Auto Expenses | Car repairs, tires, registration | $1,200 |
| Insurance Premiums | Car, home, renters, life | $1,800 |
| Holidays and Gifts | Christmas, birthdays, anniversaries | $1,000 |
| Home Maintenance | Repairs, appliances, yard work | $2,000 |
| Medical Expenses | Copays, dental, vision, out-of-pocket bills | $1,500 |
How to Set Up a Sinking Fund
1. Identify Future Expenses
List out predictable costs you expect throughout the year. Focus on large or irregular bills that don’t fit your monthly budget.
2. Estimate Total Amount Needed
Research previous years’ spending or use conservative estimates to decide how much each category will cost annually.
3. Divide by Time Frame
If your car insurance premium is $1,200 due in 6 months, divide $1,200 ÷ 6 = $200 per month. That’s your savings target for that category.
4. Create Separate Savings Buckets
You can use actual separate accounts or sub-savings within apps like Ally, Capital One 360, or Yotta. Label each fund clearly.
5. Automate Contributions
Set up automatic transfers every payday or monthly to your sinking fund buckets. Treat them like a recurring bill you pay yourself.
Example Sinking Fund Setup
| Category | Annual Goal | Monthly Savings | Account Type |
|---|---|---|---|
| Car Repairs | $1,200 | $100 | High-Yield Savings |
| Holiday Gifts | $900 | $75 | Sub-account |
| Insurance | $1,800 | $150 | Money Market |
Best Banks and Apps for Sinking Funds (2025)
| Bank/App | APY | Sub-Accounts Feature | Monthly Fees |
|---|---|---|---|
| Ally Bank | 4.20% | Yes (“Savings Buckets”) | No |
| Capital One 360 | 4.15% | Yes (“Performance Savings”) | No |
| Chime | 2.00% | No sub-accounts | No |
| Yotta | Up to 5.00% + prize rewards | Yes | No |
Real-Life Examples
Rachel from Ohio: “I used to stress every December about Christmas gifts. Now I save $50 a month year-round. When December comes, I’ve got $600 ready — stress-free.”
Jordan from Texas: “After getting hit with a $700 car repair, I created a sinking fund for my car. I now save $60/month and haven’t used a credit card for car expenses since.”
Tanya from Florida: “We used a sinking fund to pay our $1,500 insurance premium in full, saving money compared to monthly payments. It’s a game-changer.”
FAQs About Sinking Funds
Is a sinking fund the same as an emergency fund?
No. Emergency funds are for unexpected situations. Sinking funds are for planned, known expenses.
Do I need a separate bank account for each sinking fund?
Not necessarily. Many online banks let you create multiple labeled sub-accounts within one savings account.
What if I can’t afford to fund all categories?
Prioritize the most urgent ones. Even saving a small amount regularly helps. Add more as your income grows.
Can I invest my sinking fund?
Generally, no. Keep it in cash or low-risk accounts since the goal is access and stability, not long-term growth.