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 the sinking fund method.  What is it, ways to make it work for you, and more.  This can change your life in a fantastic way!

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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 the Sinking Fund Method?

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.

The sinking fund method 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 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).

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 the sinking fund method helped Kristin with her debt:

We set up a 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 sinking fund 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 price 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.  The fun stuff should 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, get a spiral notebook to record 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, when you use the money in a category, you can refill it using the money you would have sent from your check (or extra money you’d been sending to debt). If you don’t have a few hundred lying around to do that, be sure to check out these 30 ideas for saving and making enough money to fill your sinking fund.

If you’d like to receive an email each day to go through this challenge, 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.)


The Sinking Fund Method 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.  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).  Click the sheet, 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?


The sinking fund method can change your finances for good.

The only sinking feeling you should be experiencing 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?

How To Use the Sinking Fund Method To Get Out of the Debt Trap
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How To Use the Sinking Fund Method To Get Out of the Debt Trap
What is the sinking fund method? Learn why it's an important tool for getting out of debt and building wealth. Includes a free sinking funds spreadsheet!
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Medium Sized Family
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