What is a sinking fund and do you need one? Or five?

Piggy bank

If you’ve ever had months where it seems like every piper has come to be paid, this is the tool for you! Sinking funds will help you to alleviate those months where it seems like the property taxes are due and two birthdays are coming up and for some reason it’s also the month Amazon Prime renews. Gross!

What is a sinking fund?

A sinking fund is a savings account with a purpose. You probably have a savings account for emergencies. You might even have savings accounts for your kiddo’s college or your retirement (also called investments). The sinking fund is completely different!

Sinking funds are savings accounts for your large budget items that come around once or twice a year. Property taxes, Christmas and vacation are examples of sinking funds you might want.

The typical Florida homeowner pays $2035 annually in property taxes.


The original example of a sinking fund uses a real estate investor as an example. Let’s say the investor buys an apartment building. This investor buys the property knowing that he will have to purchase a new roof in ten years. The investor then calculates how much that roof will cost, divides it by 10 and starts setting aside that amount each year so that when it’s time, he can buy the roof!

The sinking fund is different from an emergency in that you know these expenses are coming and you plan for them. The emergency fund is set aside for things you can’t predict or plan.

Related: Everything you need to know about an emergency fund

What types of sinking funds are there?

Your sinking funds will sometimes pay for not so fun stuff (taxes) and they will sometimes pay for fun stuff (vacations). Either way, these large ticket items that are bound to come up are covered! Below are some examples:

  • Home repairs
  • Car repairs
  • Car registration
  • Taxes
  • Medical / Dental / Vision expenses
  • Prescriptions
  • Insurance premiums (life, auto, property)
  • Trash or other quarterly utilities
  • Oil / Propane
  • HOA fees
  • Snow tires
  • Vacations
  • Season Passes
  • Gifts / Birthdays
  • Christmas
  • Amazon prime
  • Pet care
  • Furniture
  • Home remodel
  • Back to school / clothing
  • Tuition
  • Car replacement
  • Wedding
  • Moving
  • New Baby

Budgeting for them

When we budget, we think monthly. With sinking funds, we’re taking an annual expense and putting it into our monthly expenses. So, how do you put these sinking funds in your budget?

Grab the worksheet below!
  1. Brainstorm every sinking fund you have for a year.
  2. Calculate how much you need for that expense. Get as close as possible!
  3. Divide that sinking fund by the number of months you have to save for it!
  4. Put that number into your monthly budget!

Where to put the money

Once you’ve got that monthly budget line item for each sinking fund, you may be wondering where to put it! You can either save your money in “digital envelopes” or in cash envelopes.

Related: Why & How You Should be Using Cash

Cash envelopes are probably the “easiest” way to save your money. They do require the most work in that you have to go to an ATM. But, after that you can just neatly tuck money away for the day when the bill comes due! This works nicely for Christmas, gift giving and even vacation.

If you decide you need to set aside $25 a month to save for Christmas but don’t want to use cash, consider buying one Amazon gift card a month to use when you shop for Christmas!

However, there are some times a cash sinking fund just won’t work. In that case, we recommend “digital envelopes” which are simply savings accounts designated and named for your sinking funds.

We have borrowed Mike Michalowicz’ phrase, “When in doubt, add an account.” You can open an account for each thing you’re saving up for or you can open one big account and track what is what on a separate spreadsheet. By opening up a bunch of accounts you’re working with your (and our) basic habit of “bank account balancing,” another phrase coined by Mike. That means, you can clearly and easily see what you’ve set aside simply by looking at your accounts which is something you probably do pretty often anyway. In that way it can be very rewarding and motivating!

However, if seeing that money is going to be triggering or troublesome, you can consider using accounts in a different bank. You can also hide the sinking funds from your view.

We have a no frills worksheet for you to brainstorm and write this out. Enter your information below to get your copy!

Ideal Balance is The Life Coaching Facility in Navarre, Florida that focuses on Fitness, Family & Finance. We help our clients create the discipline & habits they need to strip off what’s holding them back from living the life God created them to live. We work with clients in 1-on-1 sessions in person, virtually and in small groups. We offer life coaching, financial coaching, health coaching. We also offer personal training and home organization locally here in Navarre, Florida. Fill out the information below if you’re interested in our help and we will contact you.

4 responses to “What is a sinking fund and do you need one? Or five?”

  1. […] Related: What is a sinking fund and do you need one? Or five? […]

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