Sinking Funds For Beginners: A Complete Guide To Smarter Saving!

Last Updated January 16, 2025 by Davina Kelly

Sinking funds for beginners are a great addition to your personal finance tool kit. I started using them a few years ago after I was tired of being broke after paying for large expenses. 

Sinking funds have made saving for big-ticket items so much easier. I’m so glad I included them in my budget as I can now spread the cost over time instead of trying to find the money upfront. 

If you’ve ever wondered “what is a sinking fund” and want to get started but don’t know where to begin, I’ve got you covered.

In this post, I’ll break down sinking funds for beginners. I’ll explain what a sinking fund is, the best types of sinking funds, why they’re so helpful and how you can set one up to make saving simple and stress-free. 

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Sinking Funds for Beginners: A Complete Guide:

What Are Sinking Funds?

A sinking fund is a smart way to save by putting away money for a specific expense or financial goal. 

Instead of scrambling to come up with a big chunk of cash all at once, you set aside a little bit each month. 

It’s a great way to save for those expenses you know are coming – like a vacation or car maintenance that might be too much to cover from just one paycheck.

Plus, it keeps you from having to rely on credit cards or loans, which means no unnecessary debt. 

Here’s an example:

Let’s say you have a car and your annual insurance bill is $780.

Instead of stressing to pay the full amount all at once, you set up a sinking fund and save $65 a month.

By the time the renewal date rolls around you’ve got the full amount ready to go.

No stress, no last-minute borrowing and no worrying about how you’ll make it through the month after paying that big bill.  

This is why sinking funds are a great addition to your budget especially for beginners.

They’re a simple way to save for those yearly expenses so you can plan ahead and stop worrying about big-ticket bills. 

Personally, I’m a huge fan of sinking funds – they’ve completely changed the way I manage my money. 

I love to travel at least twice a year, but I used to stretch my paycheck to the limit trying to cover flights and hotels all at once.

Now, I have a dedicated travel sinking fund and it’s been a game changer!

Saving smaller amounts each month has allowed me to book my trips stress-free and fully enjoy them without feeling broke afterwards.

The great thing about sinking funds is you can create one for almost any financial goal.

Right now, I’ve got three main sinking fund categories. They are:

• Vacations
• Car costs (insurance, maintenance, etc)
• Property downpayment

How Sinking Funds Are Different From Emergency Funds

A sinking fund is a way of saving, but it’s important to keep it separate from your regular savings and your emergency fund. 

Think of it this way: your savings account is for building your financial safety net while sinking funds are a tool to help you save for specific expenses. 

Sinking funds and emergency funds also serve very different purposes.

A sinking fund is for those predictable expenses you know are coming and can plan for – like home insurance birthdays, Christmas or even a new sofa.

It’s about saving intentionally for those goals or costs. 

An emergency fund, on the other hand, is your financial cushion for life’s curveballs.

It’s there to cover unexpected expenses like damage to your home like a leaky roof, or sudden medical bills. 

Essentially sinking funds are for the “knowns” and your emergency fund is for the “unknowns”. 

Related: How To Build an Emergency Fund Fast

Benefits of Sinking Funds

If you’re not already using sinking funds, you’re missing out on one of the best budgeting hacks.

Here are some of the benefits. 

Helps Avoid Debt

One of the biggest benefits of sinking funds is that they help you avoid debt. When an expense pops up – like your pet needing an emergency vet visit – you’ll already have the money saved. 

No need to pull out a credit card or take on a payday loan.

This is a mistake I personally made which led to me being in debt for 2 years!

Reduces Financial Stress

Let’s be real: money stress is the worst.

Constantly worrying about how you’ll afford upcoming bills can take a toll on your mental health.

Sinking funds can eliminate that stress by giving you a plan. 

When you know your holiday shopping fund is ready, you can enjoy the season without guilt or anxiety.

When your car repair fund is fully stocked, you can handle unexpected maintenance with ease. 

Encourages Intentional Spending

Sinking funds make you think carefully about your financial priorities.

Instead of mindlessly spending, you’re assigning every dollar a purpose.

This intentionality helps you align your spending with your goals and values, so you’re using money in ways that truly matter to you. 

Related: 14 Practical Mindful Spending Habits

Types Of Sinking Funds

One of the best things about sinking funds is their flexibility. You can create funds for anything that matters to you.

Here are some of the most common types of sinking funds to consider. 

Recurring Expenses

There are expenses that don’t happen every month but are predictable such as: 

• Car maintenance: Oil changes, new tyres or repairs.
• Insurance: Annual or semi-annual payment for car, home or life insurance.
• Medical expenses: Routine checkups, dental visits or prescription costs. 

Irregular Purchases

These are costs that pop up occasionally but aren’t part of your regular budget. 

• Holiday shopping: Gifts, decorations and festive meals.
• Birthday or celebrations: Parties, gifts or special occasions.
• Back-to-school supplies: Clothes, stationery and tech for your kids. 

Big-Ticket Goals

Sinking funds can also help save for larger, long-term goals like:

• Vacations: Flights, hotels and activities.
• Home renovations: New furniture, appliances or upgrades.
• Weddings: Whether it’s yours or someone else’s, weddings can get pricey fast.

How To Set Up Sinking Funds for Beginners

Now you know what sinking funds are and how they can help improve your finances, let’s get into creating them.

I suggest having no more than four otherwise it could be overwhelming, especially for beginners. 

Step 1. Identify Your Savings Categories

Start by brainstorming all the expenses you’d like to save for. Think about:

• Annual bills (insurance, subscriptions)
• Seasonal costs (holidays, back to school)
• Personal goals (a new car, a dream vacation)

Don’t overwhelm yourself by trying to save for everything at once.

Pick a few high-priority categories to start with and add more as you get comfortable. 

Step 2. Determine How Much You Need

Once you’ve chosen your categories, calculate how much money you’ll need and when you’ll need it.

For example, if you want to save $1,200 for holiday shopping in 12 months, divide $1,200 by 12. You’ll need to save $100 a month. 

If you’re saving $3,000 for a wedding in two years, divide $3,000 by 24 months. That’s $125 a month. 

Breaking your goals into smaller chunks makes them much more manageable.

Step 3. Add Sinking Funds To Your Budget

Now that you know how much to save, it’s time to incorporate your sinking funds into your budget.

Treat these savings like any other expense – just like rent, utilities or groceries. 

If you’re using a budgeting app or spreadsheet, you can create specific categories for each sinking fund. 

Step 4. Choose Where To Keep Your Sinking Funds

As I mentioned earlier, your sinking fund should be kept separate from your other savings.

Here are a few different places you can keep them: 

Separate savings accounts:

Many banks let you open multiple savings accounts for free.

You can name each account based on its purpose – like “car insurance” or “vacation fund.”

A single account with tracking: 

If you prefer keeping things simple, you can use one savings account for all your sinking funds and track each fund’s progress using a spreadsheet or budgeting app. 

Just ensure you update your tracker regularly to avoid confusion. 

Whichever method you choose, try to use a high-interest savings account if possible.

It’s a great way to earn a little extra while keeping your money safe and accessible when you need it.

Cash envelopes: 

For visual savers, cash envelopes are a great option.

You can label an envelope for each sinking fund and add money to it every month. Seeing the cash grow can be super motivating!

Step 5. Track Your Progress

Tracking your progress is key to staying on top of your sinking funds and keeping yourself motivated. 

Use a tracker whether it’s a budgeting app or even a good old fashion notebook.

Record every contribution you make and watch your balance grow over time.

Also, make it a habit to review your sinking funds at least once a month.

This helps you see your progress, make any necessary adjustments and ensure you’re still on track to meet your goals.

It’s so satisfying to see your hard work pay off, one small step at a time.

Sinking Funds for Beginners: Tips to Make it Work

Once your sinking funds are up and running, here’s how to make them as effective as possible.

Automate Your Savings

Set up automatic transfers to your sinking funds each payday.

Automation takes the guesswork out of saving and ensures you stay consistent.  

Prioritise Based on Goals

If you can’t save for every sinking fund at once, prioritise the most urgent or important ones.

For example, a car repair fund might take priority over a vacation fund if your car is showing signs of trouble. 

Adjust as necessary

Review your progress regularly and make adjustments as needed. Doing this will keep you motivated and ensure you stay on track to achieve your goals.

Final Thoughts

Sinking funds might sound intimidating at first, but they’re super simple once you get started. Start small, stay consistent and watch how they transform your finances.

You’ll wonder how you ever managed without them. 

What sinking funds do you have? Let me know in the comments below. 

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23 Sinking Fund Categories To Consider for Your Budget

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How To Build an Emergency Fund Fast