A sinking fund is an account in which you set aside money each month to put toward a goal at a later date. It is a separate pot or bucket of money to shield you from using your savings when something unexpected arises.

Now that we know what a sinking fund is, it’s essential to know that creating a sinking fund can be your first step to crushing your goals in a consistent, passive way. Today’s post will outline the different types of sinking funds, creating one, and the advantages of a traditional ‘savings account’ method.

We’ll also cover strategies for consistently putting money towards your goals and tips for staying on track.

How do sinking funds work?

Most of the time, saving for a financial goal can be overwhelming. So instead, a sinking fund is a strategy to avoid financial stress and, more importantly — avoid blowing your budget. Each month, you’ll put a small sum of money into a separate high-interest savings account of your choice towards a goal that is coming soon, such as your kids’ birthday, summer vacation or Christmas.

You may have a number in mind for these infrequent expenses. However, these costs might be in specific areas of your budget, like a routine oil change or a goal you are working towards that only happens once a year.

Once you’re aware of your savings goal, you pick an end date when you hope to have the money saved and contribute on a consistent schedule until you reach your goal. This is the reverse of how we are conditioned: to finance anything we can’t pay cash for in our daily lives. Surprise! You don’t have to go into debt to buy something that you *knew* was coming.

Setting up automatic contributions is the best way to stay on track and hit your sinking fund goal. Using automation, you can have your financial institution move a small amount of money to your sinking fund each week or month. The best part? You likely won’t even notice the transfer but will surely hit your goal easily. For example, I have two separate $20/week transfers into different savings buckets. Because I’m used to mindless purchases on takeout and coffee, this is just another $20 that I don’t miss — except this time; it’s going towards my future self.

Why do you need a sinking fund?

For all kinds of reasons!

Sinking funds are valuable because making smaller, regular contributions eventually add up BIG. So rather than only saving in big chunks, guilting yourself for depleting your ‘savings’ or having to rack up your credit card because you weren’t prepared, sinking funds are a straightforward way to save money without having to pinch your pennies.

It is an excellent strategy for offsetting life’s “expected emergencies.” These are the kind that is not significant enough to cause financial ruin but will cause a hiccup in your financial plan if they are unaccounted for, as they always seem to pop up at the worst times.

PS: I go over ALL of this in my latest book. Hint, hint, nudge, nudge.
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What is a sinking fund used for?

Your goal and reasoning for starting a fund are, of course, personal to you, but here are some examples of types of sinking fund goals to get you started:

– To build an emergency fund

Contributing extra cash from your budget each month is a great way to build up a buffer for anything unexpected quickly. I firmly believe that multiple emergency funds can help protect you from life’s many unknowns, such as household emergencies, personal emergencies and beyond.

– A replacement set of tires for your vehicle

Rather than be caught off guard by the first snowfall, plan a season or two ahead if you know you’ll need a new set of tires, especially if you live in an area with inclement weather. I’m looking at you, eh!

– Future vacation

Do you know how much easier it is to save monthly for a future all-inclusive girls’ trip? Stagette? The only thing easier to swallow than that is the bottomless margaritas you know weren’t slapped on your credit card.

-‘Planned emergency’ like a pet or home expense

Figure out the price of your most costly appliance to replace or the range of an expensive vet bill in your area. This could include a significant home renovation like new shingles or a large purchase like furniture.

– New phone

Have you ever experienced the feeling of paying for your phone in full at the start of your plan? You won’t miss the monthly payments for your device — or any interest that could be added on.

– Wedding

This could be to save for your wedding or attend someone else’s big day who is close to you. Someone close to you (who’s been talking about destination weddings since high school) gets engaged? Start chucking money at that fund, baby.

This method can also relieve the pressure of hitting your goals if your financial situation changes and your money is needed elsewhere in your monthly budget.

Missing one or two contributions is (hopefully) not going to derail your goal completely.

What is the difference between a savings account and a sinking fund?

The most significant difference between a general savings account and a sinking fund is how you’re saving. Most importantly, the schedule and frequency of putting money in your sinking funds are typically much more routine than most other goals.

A savings account is often unused because it exists without a purpose until needed. I’ve found sinking funds to be powerful because I know I intend to use all of my money to benefit future me.

How much should you save?

As much as you want! That depends on your financial situation, specifically your goals and the timeframe for reaching them.

For example, say you’re going to book Disneyland at the end of the year. It’s currently January. The trip will cost you around $5,000. Therefore, you’ll need to save $417 per month. That number sounds overwhelming. So, instead, you opt to save $96 per week or $14 per day. Say it’s you and your partner saving for the trip. That means you could save $7 per day and hit your goal by the end of the year. Seeing numbers in smaller increments can make saving for steep financial goals much easier.

Not only that, but if you miss a few weeks or days because another priority or expense comes up, you’ll still be much further ahead than you would be if you just crossed your fingers and hoped your credit card would have enough room to charge the trip.

To help you get started… 
Use my free sinking fund calculator

All you have to do is input your savings goal amount and date. You can customize the names of each of your funds and organize where all your money is saved.

How do you start a sinking fund?

Step 1: Choose your target amount as a goal.

Step 2: Pick a future date when you want to have that amount saved.

Step 3: Figure out the number of months between now and your goal date.

Step 4: Pick an account and start contributing!

Great! Now you’re on your way to prepping for ‘planned emergencies’ so your budget or emergency fund stays intact.

Where should I put my money?

One of my favourite options is Neo Financial for short-term financial goals and high-interest savings accounts. This financial institution is online but offers great savings rates (in comparison to most Canadian options) and has excellent insurance coverage to protect you and your money.

High-interest savings accounts are low to no risk for consumers to use as a tool to help them hit their short-term financial goals. I have several buckets for savings right now, with sinking funds for vacations, home renovations and holiday seasons. These financial institutions have been integral in helping me achieve my goals year after year.

A sinking fund is great for peace of mind

Contributing regularly to an account with a goal in mind helps remove the emotional burden of financial guilt.

A sinking fund, although similar, has different psychology than a general savings account, which can make you feel worried if you have to withdraw from the balance you’ve worked so hard to accumulate. However, when you reach your goal, putting money away with a sinking fund strategy means saying bye to guilt. Instead, it’s time to use your earned money for something that was planned all along.

Once you try sinking funds, I’m confident you’ll find it’s yet another tool to keep your financial life organized and headed in a positive direction!