by Tara Blaine

Make a Sinking Fund in Six Steps

Want to save more strategically? A sinking fund might be just the ticket. Get the security of knowing you’ve got a savings plan—and the sweet success of hitting your savings targets with a lot less willpower!
What is a Sinking Fund

You know it’s a good idea to save up money, but it’s easier said than done. If you’re struggling to save, it may be time for a sinking fund.

If you’re thinking, “what is a sinking fund?” you’re not alone. It’s kind of a weird name—but it’s an awesome savings approach. Sinking funds help you get strategic with your savings, squirrel your cash away with less willpower, and spend your hard-earned hoard guilt-free!

What’s a sinking fund?

A “sinking fund” refers to saving up—a little bit at a time—for a single purpose. It can be for something special—like your wedding—or something more ordinary—like your twice-annual insurance premium. As long as you’ve got a specific target in mind and are saving for it bit by bit over time, it’s a sinking fund!

Here are some common reasons why people start sinking funds:

  • One-time expenses, like a new transmission or your mom’s birthday present
  • Infrequent expenses, like your quarterly water bill or twice-a-year oil change
  • Expected but unpredictable expenses, like unscheduled car or home maintenance (for example, a flat tire or a broken pipe)

Note: For our fellow financial nerds out there wondering why it’s called a sinking fund, no one’s entirely sure! But it’s likely because the term was coined (groan) by companies saving up pay off bonds they’d issued. You “float” a bond when you issue it; when you pay it off, you “sink” it.

What’s the purpose of a sinking fund?

Saving up is great, but setting aside money every month with a specific intention can make it easier to hit your goals—that’s the whole point of a sinking fund. How do you decide if you can afford to take money out of savings to buy a new bike for your kiddo when you know the fridge is getting old and tax time is coming up? With a sinking fund for each of those savings goals, you’ll know the answer. Get strategic with sinking funds—once you’ve got a plan, making decisions is a lot easier.

It also takes less willpower to save when you have a concrete goal. For example, it’s hard to talk yourself into making dinner after a long day at work when your savings goal is “the future”—that pizza delivery is calling your name now! But if you’re saving for the certification that will help you snag the new job you’re dreaming of or the big family reunion next year, firing up the stove is a no-brainer.

Finally, specific targets make it easier to actually spend your nest egg! When you’ve been piling up your pennies, it can be tough to see your balance go down. But when you save for a particular item, you’ll feel the sweet success of hitting your target, and then spend with satisfaction.

Sinking funds vs. emergency funds

Sinking funds and emergency funds are different. Your emergency fund is a general purpose fund for covering the necessities when life throws you a major curveball—you’d use it to cover all your living expenses if you lost your job, for example—while a sinking fund is for a specific purchase you’re planning to make.

And sinking funds are a great way to protect your emergency fund! You’ll be less tempted to dip into your emergency fund for non-emergencies when your other savings needs are covered.

Here’s a guide to making an emergency fund if you don’t have one yet.

Make a sinking fund in 6 easy steps

1. Figure out what save for You’ll start by answering this question: “What’s the purpose of a sinking fund in my financial world?” Sit down with your calendar. What’s coming up in the next year that you’ll need money for? Think about bills, car/home maintenance, gifts, travel, events, etc. You might want to look even further out if you’ve got something big on the horizon, like a down payment.

Write it all out, and then decide what to save for! You can set up as many sinking funds as you want—but remember that you’ll need to track them all. Starting with one or two can be a good way to set yourself up for success. Make sure to prioritize your most important goals or expenses!

2. Pick a target date Now write down when you need to have the money by. This might be a hard date, like the day you need to buy a plane ticket for a trip. Or it could be more flexible—for example, if you’re creating a home-repair fund to dip into when needed.

3. Decide on a funding schedule Write down how much you want to save. If you know the exact cost (like the new laptop you’ve already picked out), that’s your target. If it’s something that varies, like car maintenance, estimate as best you can (you may want to look at past bills).

Now figure out how much, and how often, to contribute to your fund. For example, if you’re trying to save $300 in six months, that’s about $12 a week, or $50 a month.

4. Double-check your budget Here’s where the rubber meets the road—does your savings plan fit into your budget? If not, look for places to trim or additional income sources. You could also move your target date further out of possible—or look for a less expensive option.

And if you don’t have a budget yet, get started so you can move forward with your savings plans. This post has an overview of three popular methods, plus instructions, examples, and easy-to-use templates!

5. Start saving Once your sinking funds are built into your budget, just move the money you’re saving aside regularly (daily, weekly, monthly—whatever you choose). Think of it like paying a bill, but the money goes to future-you! If your income is predictable, a recurring transfer is a great idea. If not, set a calendar reminder. The more automatic you can make it, the better!

You’ll want to keep track of how much you save for each sinking fund so you can watch your balance grow. If you’re a Simple customer, you can create a Goal for each sinking fund—we’ll automatically move money for you and your Safe-to-Spend® will help you avoid accidentally eating into your stash.

Another option for storing your savings is a separate account. You could open a savings account or, if you use Simple, a Protected Goals Account. Not only will your money be totally protected from spending until you want it, you’ll earn interest so you get to your goal faster!

6. Stay on target Schedule regular check-ins to see how you’re doing—weekly is a good frequency to start. Wrap it in with your regular budget check-in! Expect to learn as you go and make adjustments. And make sure to give yourself high-fives for every financial victory, large or small!

Sinking funds with Simple

Your Simple Account makes managing your sinking funds a breeze! Here are instructions for using Goals, a Protected Goals account, or both for your sinking funds:

Remember that your Goals are deducted from your Safe-to-Spend® amount, so you’ll always know exactly how much you can spend while staying on your savings game.

Sinking funds are a solid strategy for saving—and they take less willpower than saving without a specific target. Get the security of knowing you’re tucking away money to meet your goals, and the fun of guilt-free spending when you hit your targets!

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