Sinking Fund
Definition
A savings strategy where you set aside money gradually over time for a known future expense, such as a vacation, car repair fund, holiday gifts, or insurance premium.
A sinking fund is money you save incrementally for a specific, planned expense. Unlike an emergency fund (which covers unexpected costs), a sinking fund is for expenses you know are coming — annual insurance premiums, holiday gifts, vacations, car maintenance, or home repairs.
The concept is simple: divide the expected expense by the number of months until you need it. A $1,200 annual insurance premium due in December means saving $100/month starting in January. When the bill arrives, the money is ready — no budget shock, no credit card needed.
Common sinking fund categories include: annual insurance premiums, vehicle maintenance/registration, holiday and birthday gifts, vacation travel, home maintenance (1% of home value annually), medical/dental expenses, clothing, technology replacements, and back-to-school expenses.
The practical implementation involves separate sub-accounts or careful tracking within a single account. Some banks offer multiple savings "buckets" that work perfectly for sinking funds. Alternatively, a spreadsheet or budgeting app can track how much of your savings is allocated to each sinking fund.
Sinking funds transform irregular "surprise" expenses into predictable monthly amounts. This is one of the most powerful budgeting techniques because it eliminates the budget-busting effect of large periodic expenses that derail monthly budgets when they hit.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
How many sinking funds should I have?
Start with 3-5 for your biggest known expenses (holidays, insurance, car maintenance, vacation). Too many becomes hard to manage. As you get comfortable, add more for smaller categories. The goal is to eliminate large 'surprise' bills that derail your monthly budget.
Where should I keep my sinking funds?
A high-yield savings account is ideal. Some banks let you create multiple 'buckets' within one account for different sinking funds. Alternatively, keep all sinking funds in one HYSA and track allocations in a spreadsheet or budgeting app.