How to Build a Sinking Fund and Get Out of the Debt Trap

Watching the balance on our biggest credit card shrink over the past year has been…how should I put this?  Ah-maz-ing!  Our main goal in our #yearofno has been to knock out this debt every chance we get.  It’s gone so well.

But there is one thing that I wish we had done differently.  Something that could have made a bigger difference in our debt payments.

It’s called a sinking fund. It’s a genius (but uncomplicated) idea that prepares you for those nagging expenses that add to debt.

So let’s dig into the world of sinking funds.  What they are, options to try, and more.  This can change your life in a fantastic way!

Sinking Funds 101

How to Build a Sinking Fund and Get Out of the Debt Trap. If you're looking for sinking funds ideas, this post is packed with info. Ideas for breaking up your categories, a spreadsheet to help you do it, and info on helping to find money to fill it.

What is a sinking fund?

Having an emergency fund is important, but it’s a bit different than a sinking fund.  Emergency funds are good for covering expenses that come out of nowhere and can bankrupt you in no time. An emergency like a sudden layoff, an accident, or a surprising health discovery is different from annoying bills.

A sinking fund is an account (or a set of envelopes) that prepares you for expenses that pop up and give you a headache. Those once-per-year insurance bills.  Unpredictable car repairs. Garbage bills that get paid every 3 months…though you can never remember exactly which month they’re due again.

When those bills come in the mail, do you get a sinking sense of dread in the pit of your stomach?  You can cover this bill, but it will be a stretch.  Or worse, it’s going to have to go on a credit card (again).

It’s ironic, but the way to stop that sinking sensation is with a sinking fund.  This fund gets you ready for these expenses.  It also keeps away the panic that makes you add to credit card bills.

Here’s an example of how sinking funds helped Kristin with her debt:

We set up an emergency fund when we first started by selling what we could and doing a pantry challenge for 3 weeks to make up the difference. It gave us $500 for emergencies and a good kickstart at paying our first piece of debt down. That momentum fed our hunger to be debt free and it snowballed from there.  ~Kristin of Mini Slice of Farm

How to Set It Up

You can set up your sinking funds a few different ways.  One simple way is to have envelopes in a drawer labeled with individual categories.  The money is at the ready when a bill comes due.

Our preferred method is to have a separate checking account.  We use Capital One 360 because they don’t charge fees.  You don’t need direct deposits to keep the account free, either.  The money is more out of sight out of mind, although we do have a debit card should we need to get to it.  We avoid ATM fees by doing a cash advance on our debit card inside our local bank.

If you choose the separate bank account method, you’ll have to create “imaginary envelopes” for yourself.  This is simple to do in a spreadsheet or a spiral bound notebook.  We’ll talk more about this in a minute.

Examples of Sinking Funds

The next thing to do is list everything that deserves a line in your sinking fund.  You might not have the money to fund it all yet, but you should still list all the categories you can think of.  (Yes, even that dream vacation to the Caribbean.)

Sinking Fund Category IdeasSome sinking fund category suggestions include:

  • bills paid less often than monthly like trash or water
  • car taxes or tags
  • insurance bills
  • Christmas
  • vacation
  • school or membership fees
  • car repair and maintenance (including tires and oil changes)
  • birthday gifts
  • home maintenance
  • appliance repair or replacement
  • healthcare copays (though you’re better off with an FSA or HSA)
  • big expenses you are expecting soon such as braces or furniture replacement
  • extra reindeer food in December (Just checking…)
  • anything else that applies to your situation


The Magic Formula

Next, we have to talk numbers.  (I’ve never been a math fan, so I always pull out my trusty calculator.)  Next to each category you’ve written, determine how much money you spend on that item per year.  Some will be straightforward.  Bills that usually stay the same price, but come less often than monthly, are an easy way to start.  (Looking at you again, garbage bill.)

Others are more elusive.  How long has it been since you bought tires?  How often do you get oil changes?  If you use a debit or credit card for these things, you can search your statements to get a better idea.  Otherwise, an educated guess is good enough.  The goal is to get it set up.  You can tweak it as you go.

Sinking fund categories

You might notice that the numbers are climbing.  It might even exceed any cost you could ever hope to keep up with. I noticed this in my own budget.  Maybe that’s why we can never seem to get ahead?

So put your items in order from most important to least important.  We’ll fund as many accounts as we can before the money runs out.  Filling the vacation and Christmas funds is wonderful, but a reliable vehicle should come first.  They still earn a place on your chart.  Once you get ahead, you’ll be able to fill them, too.

To keep track of money lumped into one bank account, dedicate a spiral notebook to your sinking fund.  Dedicate one page to each category.  Whenever you deposit money, mark down how much you put into each category.  As you spend from this fund, write down any subtractions in their proper category.

You could also open one account for each category, which is another reason we like Capital One 360.

How to Fill the Fund

Finding the money to fill this account all at once is ideal.  Then the money we usually send as “catch up” payments could refill the sinking fund instead. If you don’t have a few hundred lying around to do that, stay tuned.  I’m dedicating January to helping you do just that!

I’m creating a new email list just for the challenge.  If you want to be notified when it goes live and get extra help filling your sinking fund, sign up here.  (This is a whole separate list from my regular newsletter.  You’ll only get emails regarding the “Secure Your Savings and Find Peace in the New Year” series.  Never spam.)


Sinking Fund Spreadsheet

If you’re a paper and pencil kind of person, grab them and put together your plan.  This might involve a lot of erasing as you decide which categories to fill first, second, and so on.  But totally doable.

You’ve got a yearly amount down for each category, so divide that number by 12.  That’s how much money you’ll need to put into the account every month to keep up with these expenses.  If you’re paid biweekly and want to divide it by 26, do that.

Now go down the list and see how many categories you can fill with the amount of money you’ll be able to afford each month.  If you don’t like what you’re seeing, be sure your categories are in order.  Most important items at the top.  Remember, we’ll be talking about ways to better fund this in January.  Don’t get discouraged!

If you prefer a good spreadsheet (Me!  Like the proud nerd I am.) I’ve put one together for you.  You can access this in Google Sheets (similar to Google Docs).  Copy this sheet and save it as your own.  You can move around your own categories.  Simply put in the amount you can afford monthly.  Type in your categories and how much each of them cost per year.  The sheet will take care of the rest of the math.

Play with it a bit until you’ve filled as many important funds as possible.  Can you do without anything?  Can you find a way to increase your monthly amount?


Building a sinking fund can change your finances for good.

The only sinking feeling you should experience is when your toes are going into the sand.

For more reading, check out How to Get Out of Debt By Breaking Up Your Paycheck.

How to Get Out of Debt Break Up Your Paycheck


Have you ever saved up for expenses like this?

Article Name
How to Build a Sinking Fund and Get Out of the Debt Trap
What is a sinking fund? Learn why it's an important tool for getting out of debt and building wealth. Includes a free sinking funds spreadsheet!
Publisher Name
Medium Sized Family
  1. Neat way of looking at it, Jamie. There are certainly costs that aren’t regularly but can be anticipated and funded from regular income. We usually just maintain a buffer in our regular account for them, but having a dedicated fund to move the money out as you earn it makes a lot of sense…that way you have it when you need it.

  2. Ohhh, I feel a spreadsheet session coming on! I am like you – I love me some Excel for budgeting. I had a decent idea what a sinking fund was but this is a way more clear path to pursue. Thanks!

  3. I hate the feeling of not having enough money when unexpected bills arrive. I do have a sinking fund, although I’ve never called it that. It definitely helps to reduce the stress when there are unexpected expenses.

  4. I’ve never heard of a sinking fund before, but it sounds like a great idea, especially if you’re trying to get out of debt or stop living paycheck to paycheck. I know you mentioned a Capital One 360 checking account for your sinking fund, but if you put it into one of their savings accounts, you could separate it out into the various categories, and simply transfer the amount into your main checking when needed. Either way, it sounds like a great way to be prepared for all the different expenses that pop up.

  5. Jamie, I am pinning all of your financial post for future use. I have heard of a sinking fund before but did not know what it was. These are the things and that end up sinking us! As soon as Levi is able to come home, we will be able to free up about $800 a month, we definitely need to work on this. And your articles will be invaluable towards our goal of alleviating debt. Thanks so much for sharing all your knowledge and experience. I’m sure it helps many more than just me.

  6. I’ve been doing this without realizing it with my power bill! When I bought my house, I learned the power, garbage, sewer and water were all on the same bill, and they only come once every two months. Ouch. I started putting $200 every month into a separate account with scheduled transfers from my checking. I forgot for Oct and Nov and couldn’t figure out why that account balance is so low. Luckily I remembered last night when I reviewed the bill. Those expenses can come out of no where, and if I don’t set them aside, I’ll definitely spend them on something else!

  7. I do this😀 but never knew it had a name. I actually started it for my two biggest (most painful) expenses, those being property taxes and insurance. Not exactly little bills. From there I began putting in for other irregulars. I will be so curious to see what you share. It has helped me tremendously. You are so good a walking folks through things and encouraging us when it seems to be falling apart. I know it will be a fabulous challenge. Looking forward to it.

  8. I too have been doing this but never knew it was the sinking fund method. I do it a bit different though. I simply create a spreadsheet for the entire year by month. It sounds like a lot but it’s not (think cut and paste). I start out with my fixed monthly bills. Once I do that I go back and add the expenses specific to that month. For example, February for our family has four birthdays, Sportsman license in March, you get the idea. That way you are automatically funding through your budeting that additional expense that comes first. It takes the stress out of these irregular payments.