What’s a sinking fund? How to get started with this savings strategy

Everyone knows it’s important to have an emergency savings fund available for life’s unexpected expenses. But what about future expenses that aren’t so unexpected, like annual car maintenance or holiday shopping? 

Even though we know these costs are coming, we often fail to plan for them. Instead, we end up dipping into our emergency reserves or using a credit card to cover them. But there’s a better way: start a sinking fund.  

A sinking fund is a useful strategy for saving up for your short-term money goals or predictable expenses on the near horizon. It’s a savings account dedicated to a specific expense, which you gradually fund by making regular deposits or transfers. Think of it as a reverse credit card — you make monthly payments now, so you’ll be able to afford your planned expense or goal by the time the need arises. And instead of paying interest, you’ll earn interest on your balance while you save! 

Why use a sinking fund? 

You might be wondering what makes a sinking fund different from your regular savings account. The key difference is while a typical savings account serves as a single “pot” for holding all your savings, a sinking fund has a specific goal (and usually a deadline that you set) attached to it. That makes it easier to track your progress toward your goal while keeping your other savings, like your emergency fund, separate and untouched. 

“I do think it is kind of a good idea to separate out your emergency fund from a sinking fund just because otherwise it is a little bit tempting to dip into your emergency fund for things that aren't really emergencies,” says Madison Block, a marketing communications and programs associate with the nonprofit American Consumer Credit Counseling agency. 

The beauty of a sinking fund is that you can set up a separate account for each of your predictable expenses or short-term savings goals. This allows you to proactively save up for future expenses instead of relying on credit or depleting your other savings to cover the costs. You can create sinking funds for any planned expenses coming up soon. For example, a sinking fund works great for: 

• Annual expenses such as holiday shopping, vacations, homeowner’s association dues or insurance premiums (if you pay them annually instead of monthly). 

• Planned maintenance for your home, your vehicle, or any other appliance or equipment you own that needs routine repairs. 

• Managing irregular income, particularly if you are self-employed and need funds available in case you have a few lean months. 

• Large purchases such as new furniture or a big investment in your favorite hobby. 

• Predictable medical expenses such as routine care or enough to cover your annual deductible. 

How to use sinking funds effectively 

To set up a sinking fund, you’ll first need to identify which specific expense or goal you want to save for. Estimate how much you’ll need to save and how long you need to save up for it. Then calculate how much you’ll need to save each month to reach your goal. 

Next, choose a savings account that’s easily accessible and doesn’t charge fees. We recommend a high-yield savings account such as OCCU’s Ignite Savings, which pays 5.25% APY⁴ on the first $500 you deposit, to maximize the interest you’ll earn while you’re saving up. 

How to start saving with your sinking fund 

Now it’s time to start saving. A sinking fund works best when you treat it like any other bill. Make it an item in your monthly budget, set up an automated transfer so you don’t have to remember to do it each month, and let your money build up until it’s time to spend it. 

With multiple sinking funds, you might not have enough spare cash to contribute to all of them every month. That’s perfectly fine. The idea is to use your sinking funds to prioritize your monthly savings so you’re putting the most money toward your top priority or immediate goal. When you track how much money each fund has, you can easily adjust your monthly savings deposit to make sure your money’s going to the right place. 

Financial wellness tip: With MyOCCU Online & Mobile, you can set up and track your sinking funds with ease. To get started, set up Savings Goals with the Financial Wellness feature. 

While you can create as many sinking funds as you need, it’s best not to go overboard — especially if you’re just getting started. Too many sinking funds can become overwhelming and difficult to manage. You might want to start with just two or three and add more as you need them. 

Sinking funds are a powerful money tool that can help you take your savings strategy to the next level. By learning to use them effectively, you can easily prioritize your savings dollars, manage upcoming planned expenses, and achieve your short-term money goals in an even shorter timeframe.