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A sinking fund is the only thing standing between you and freedom from paycheck to paycheck living. Here’s how to get started.

Watching the balance on our biggest credit card shrink over the past year has been…how should I put this?  


Our main goal in our #yearofno has been to knock out debt every chance we get.  

Read all how we’re getting out of debt here (yes, even while raising 5 kids on one income!).

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 the sinking fund method.  

What is a sinking fund?  How can you get one?  Why should you get one?

This is gonna change your life in a fantastic way!

Want to know how to afford things that you want the most? Afford your dreams with this plan!

I Have An Emergency Fund…

Emergency funds are important, of course

But a sinking fund… is not your emergency fund.

You see, emergency funds are good for covering expenses that come out of nowhere and can bankrupt you in no time.

Things like a sudden layoff, an accident, or a surprising health discovery are emergencies…those are reasons to raid your emergency fund.

“Unexpected expenses” and irregular bills?  You don’t really want to use your emergency fund for those things.

You go outside and find that your tire magically went flat overnight.  (Maybe you did hit that curb a little too hard in the fast food lane…whoops.)

That video game your oldest has been practically drooling over is finally on sale.  You’d love to get it for his birthday in a couple of weeks.

Now is the time when that sinking fund becomes your hero.

Ok, What Is A Sinking Fund?

Sinking funds are money you keep in an account (or a set of envelopes) that’s just for specific 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…(but you can never remember exactly which month they’re due).

When those bills come in the mail, do you get a sense of dread in the pit of your stomach?  

Maybe 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).

The job of a sinking fund is to keep that sinking sensation away.

Once you get yours together, you’ll open that bill and know right away that you have the money to cover it.

How to Set Up Your Sinking Fund

Setting up a sinking fund can be done in a couple of ways. 

One simple way is to have envelopes in a drawer somewhere labeled with what you’re saving for.  

But these days, our family prefers to keep our money in a bank account.  (Specifically an online account that’s easy peasy to use.)

That easy peasy account is with Capital One 360.  We’ve been using them for over a decade (it used to be called ING Direct back in the day). 

It’s great because they don’t charge any fees.  (No tricks, either.  Some banks make you do direct deposits or other tricks, but not Capital One 360.) 

The best reason to open a separate account is as simple as “out of sight, out of mind”.

An account you don’t access regularly won’t be spent as easily.

You can keep a debit card for this account, or you can just set up online bill pay. 

Avoid ATM fees by doing a cash advance on your debit card inside your local bank.  (Capital One 360 won’t charge you for doing this, either.)

Sinking Fund Examples

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.)

These contingency funds will help you budget for unexpected expenses and life events.

Some 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 😉
  • anything else that applies to your situation

Sinking Fund Calculation

Next, let’s to talk numbers.  (Math haters, I’m right there with you!  Just pull out your trusty calculator…this won’t be too painful!)

Next to each category you wrote in that last step, determine how much money you spend on that item per year.  

Some will be straightforward.  Bills that usually stay the same price, but don’t come every month 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.

Done is better than perfect!

If this seems complicated, a free Personal Capital account might be just what you need to figure out your numbers!

Sinking fund categories

Don’t Freak Out!

You might notice that the numbers are climbing.  

Maybe they even exceed any amount you could ever hope to keep up with. 

Don’t give up hope yet!

Put your items in order from most important to least important.  Fund as many accounts as you can before the money runs out.

Filling the vacation and Christmas funds is wonderful, but a reliable vehicle should come first. 

Remember, though, that the fun stuff should still earn a place on your chart.  Once you get ahead, you’ll be able to fill them, too.

The Math Part

Now 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 get paid biweekly and want to divide it by 26 so you can pay from each check, do that.

You might also use bonuses, tax refunds, extra paychecks, or pull in some extra money by doing a work from home job every once in a while.

Now go down the list and see how many categories you can fill with the amount of money you can afford from your monthly budget.  

If you don’t like what you’re seeing, be sure your categories are in order.  Most important items at the top.  Don’t get discouraged!

How To Track Your Money

If you are using envelopes, this part is easy.  Just write one category on each envelope and drop the right amount of money into each one.

On the other hand, if you’re dumping it all into one bank account…it’ll be a little different.

But it’s not hard.

Get a spiral notebook or set up a spreadsheet to record your categories.  Use one page for each category.

Just write the category at the top.

Then, whenever you deposit money, mark down how much you put into each category.

If you deposit $50, make sure you write an amount on each page to show how you want that $50 broken down.

How do you decide the breakdown?  Well…

  • You might decide that the first category is the most important, and you want to fill it as fast as possible.  So you’ll put all of your money into that page.
  • Or you may decide that the first 3 categories are all pretty important.  So you’ll divide the money you have available into thirds, and put one chunk into each of the categories.
  • You could even decide to put half the money into the first category and divide the rest equally into your other categories.

You know your situation best.  You’ll have to decide how to layer your money to match your situation. 

As you spend from this fund, write down any expenses on the page they belong to.

Another bonus about using Capital One 360 is that they let you open up to 25 different savings accounts in one place. So you can break everything down without any extra work.

A Free Sinking Fund Spreadsheet

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).  

Click here or on the sheet below, make a copy, 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?

Click the spreadsheet below to save your own copy of the sinking fund spreadsheet!  (Go to File and choose Make a Copy.)

Where To Find the Money For Sinking Funds

If you can’t find the money in your monthly budget, try to fill this fund with extra money you find.  

You might want to use an “extra” paycheck you get in a month of 3 paydays.

Or use this fun 52 Week Money Challenge to help you get your sinking funds off to a great start!

52 Week Money Challenge

Sinking funds can seriously change your future…for the better!

You’re going to love the feeling of confidence you feel with the next irregular bill!

Have you ever saved up for expenses like this?

What are sinking funds and why do they help your budget? Even if you are a beginner budgeter you need to manage your money using this amazing tool

Sinking fund categories, free printable spreadsheet so you can track your sinking funds, sinking fund ideas

Sinking Fund: The Secret Sauce Your Budget Is Missing
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Sinking Fund: The Secret Sauce Your Budget Is Missing
A sinking fund is the only thing standing between you and freedom from paycheck to paycheck living. Here's how to get started.
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Medium Sized Family