Sinking funds seem confusing when you’re new to budgeting, but they actually make budgeting easier!

Since we started using sinking funds we have had less problems with our budget being ruined by unexpected expenses. Sinking funds have alleviated stress from budgeting and made it much easier to pay for items in cash upfront and not rely on debt.

Today I’m sharing what sinking funds are, why I love sinking funds, how to set up your sinking funds, and how to figure out what to save in sinking funds. I even show you how we set up our sinking funds at Capital One 360  in our own accounts!

Sinking funds truly can be a total game changer once you understand them! They can be pretty hard to understand at first when you start using sinking funds but they can revolutionize your financial life which is why I wanted to explain sinking funds in an easy way.

Dave Ramsey fans will talk about sinking funds a lot so hopefully this video explains what sinking funds are and how you can set up your own!

Typical sinking fund categories might include things like car repairs, home repairs, holidays, Christmas, gifts. I’ve also shared a lit of 13 common sinking fund categories.

What are sinking funds?

Sinking funds are accounts with a purpose. They are specific savings accounts designed to achieve a purpose.

They are accounts you save money into regularly for spending on expenses that are yearly irregular expenses, non-monthly expenses, unpredictable or big one time expenses.

It’s a mini savings account you create for an expense you know you’ll have in the future whether it is planned or unplanned.

Sinking funds make saving for hard to budget items strategic and stress free. You set a little bit aside each month until you hit your goal… and then you spend it!

You get to spend guilt free because you saved up the money for a specific purpose, so when you spend the money on that item you don’t have any guilt attached!

Using sinking funds is easy. Let’s say you are saving up for an event 6 months from now. You put a smaller amount of money aside into the sinking fund each month until the event where you spend it all.

Sinking funds are designed to let you spend without stress or worry.

Types of Sinking Funds

In general I’ve seen there are a few common ways to set up sinking funds.

  1. Cash envelopes sinking funds. Since a sinking fund is money you will be spending, it makes sense to sometimes do them in cash. For these you can use cash envelopes or a more secure set up like a safe.
  2. Multiple savings accounts. You can set up multiple accounts with some banks like Capital One 360 and give each sinking fund it’s own account. This is my preferred method.
  3. One savings account with a spreadsheet. Many people like to put away money into one big savings account but then track what everything is assigned to with a spreadsheet or app.

Whichever way you decide to set up you accounts, the point is to save for those expenses that would otherwise stress your budget.

In the video I show you our sinking funds and how we’ve got them set up in Capital One 360 where we keep our savings. I’ll also be opening new sinking funds so you can see how that works.

How do you set up sinking funds?

Setting up sinking funds with Capital One 360 is very easy and super quick! You can complete the whole process in less than 10 minutes in most cases.

If you want to see how we set up our sinking funds, you can see the whole process in the video below. I walk you through everything you need to know about sinking funds, from how to set them up to how to give them nicknames that match your budget.

If you want to open your own Capital One 360 you can use my referral link for a $25 bonus when you open an account with at least $250.

Getting a jumpstart on your savings with a little extra cash added to your account is a great bonus!

What sinking funds should I set up?

In general you should look at your life and consider using sinking funds for things that are unusual budget items.

This includes:

  1. Large one time purchases like a new car or your vacation.
  2. Yearly or quarterly bills that aren’t paid each month like life insurance or car insurance.
  3. Yearly expenses you are expecting but only happen once like Christmas or new clothes at the start of the school year.
  4. Unexpected expenses that you know will happen but you don’t know when like car repairs.

These are the common types of expenses you can make stress free by using sinking funds. An easy way to find the expensive events you might want to start a sinking fund for is go through the last year of expenses and see where big bills hit and where you struggled to cover something during a normal month’s budget. These things might need to be sinking funds for you.

By contributing to sinking funds each month from your normal budget you can handle these expenses that are hard to budget for and never touch your emergency fund or go into debt.

Common Sinking Fund Categories

I’ve previously shared 13 sinking funds you must use and there are many other common sinking fund you might want to try. Common categories include:

  • Car replacement
  • Car maintenance & repairs
  • Car insurance
  • Car tags
  • Home maintenance & repairs
  • Home decor
  • Furniture
  • Vacations
  • Medical expenses
  • Dental expenses
  • Pet expenses
  • Kid expenses
  • Clothes
  • Gifts
  • Birthdays
  • Christmas
  • Holidays
  • Life insurance
  • Annual bills

The sinking funds you decide to set up will be based on your life stage and what events you have happening.

Some, like saving for Christmas or planning for car repairs, will apply to most people.

How do you calculate the amount to save in sinking funds?

One way to guesstimate the amount to save in sinking funds for unexpected expenses like car repairs is to look back at your spending over the last year. How many times did you car need repairs? How many times did you get your oil changed? Add all of that up and divide it by 12 for an amount to save monthly for estimated car repairs.

If you anticipate any large repairs in the future you can get quotes for how much it might cost and then divide that amount by months or paychecks to determine how much extra you need to save.

When you have a specific date for an event or bill it is much easier to determine the amount to save monthly or by paycheck. You simply take the amount you need for the event or bill and divide it by the number or months or paychecks until you need the money.

To find out how much you need to save, you would take the total needed for the event and divide it by the amount of time until the event. In the example of this event if you needed $1,000 you would save $166.66 a month or if you got paid bimothly you would save $83.30 per paycheck (2 paychecks per month for 6 months).

If you are a visual person like I am, then it might help to have a coloring tracker to visualize your progress saving with sinking funds. My Etsy shop has a variety of savings goal trackers and sinking fund tracker tools.

How do you get money out of sinking funds?

One questions I’ve commonly been asked about setting up sinking funds with Capital One 360 is how do you get your money out from the account? Since many traditional banks make this process complicated it is easy to wonder how you actually get the money out of your sinking funds in order to use it.

With my sinking funds at Capital One I simply transfer the money back to my checking account when I’m ready to use my debit card. When I know the final amount for the purchase I move the money over instantly and then swipe my debit card. This process is what works for us.

The only downside to this is that the number of transactions moving money from one savings account back to a checking account is limited to 6 per month. This hasn’t been an issue for us since we normally only use the sinking funds once or at most twice in a single month. If you are saving in a sinking fund in an online account it should probably be for thinks you aren’t spending on frequently. If you are spending in the category often it might just need to be a cash envelope category in your budget.

Why do I use Capital One 360 for my sinking funds?

I’ve been using my Capital One 360 account since before it was Capital One 360. It was originally ING Direct but they did such an amazing job that Capital One bought them. Ultimately they changed the branding but kept all of the things that made the bank account awesome in the first place.

I share my referral link in this post because I’ve been a customer for over a decade now and I’ve only had good experiences with the account. The customer service has always been excellent, there are no overdraft or gotcha fees, and moving money is quick and easy.

There are plenty of other banks that also offer high yield savings accounts perfect for sinking funds. If your bank doesn’t offer it, check out online banks like the ones I’ve reviewed here or peek around the site for reviews on other savings accounts perfect for sinking funds.

How to include sinking funds in your budget

Once you are budgeting regularly it is an easy task to include sinking funds into your routine budget. The great thing is that planning for these bigger and unexpected expenses in advance means you’ll be unlikely to ruin a budget in the future because of those pesky expenses.

Once you’ve got the sinking fund categories you want to save for, you’ll figure out the amount you want to save per month and include that in your monthly budget. Because you are saving for things in small chunks instead of all at once it is easy to include these in your budget.

Remember that sinking funds are separate from your emergency fund. While there may seem to be some overlap, sinking funds are for planned expenses or irregular expenses you know will be coming. While things like car repairs may seem like unexpected emergencies, they are actually expenses you should expect to come every once in a while since all cars need maintenance.

True medical conditions and extensive home repairs that take you by surprise can fall under your emergency fund.

Start Your Sinking Funds Today

Sinking funds can help you save for large expenses and keep you from wrecking your budget entirely when something unexpected comes up.

Sinking funds also give you the freedom to spend guilt free on bigger items because you’ve already saved up for them.

Sinking funds are pretty much the best thing ever! Once you’ve gotten started using sinking funds in your budget it will be hard to stop.

If you have not already started your sinking funds, then what are you waiting for?