How to Create a Sinking Fund

I recently celebrated a birthday. Our local tax assessor didn’t send me a birthday card, though. He sent me a bill for our car tag renewal. Fortunately, last year I began saving a little bit from each paycheck into a dedicated savings account for this very purpose.

It was nice to move the money from savings to checking and send the tax man a check without affecting our monthly cash flow. A few years ago, I probably would have been cashing a credit card convenience check to raise the cash to pay the bill.

This is the third or fourth annual (or semi-annual) bill we’ve managed to save for using sinking funds. Here’s the strategy we use:

How to Set up a Sinking Fund

1. Open a dedicated savings account at your local bank (or online bank) or credit union.
2. Determine the item(s) for which you wish to save for all year long.
3. Divide the annual expense by the number of paychecks you plan to receive before the next bill is due. For instance, a $500 annual expense would work out to about $20 per paycheck since I am paid 26 times a year.
4. Automate the process by establishing an automatic transfer from your primary checking account to your sinking fund savings account. If your bank doesn’t allow this, contact your payroll office and have the amount siphoned from each paycheck.

This can all be accomplished within a single savings account by adding up the total dollar amount of those once or twice a year expenses and dividing by the number of paychecks you receive.

You can use a ledger, Microsoft Excel, or some other tool to help keep up with the balance and which savings goal it applies to.

Some banks, such as ING Direct, allow you to open multiple savings accounts rather easily and you can even give them a “nickame.” Here, you might have four accounts labeled Property Taxes, Car Tags, Vacation, Insurance Premiums.

The bookkeeping is certainly easier with separate accounts, but some like the idea of just having one additional account. Do what works for you.

Other Uses for “Sinking” Funds

Our “sinking fund” has graduated over the years to represent a sort of first-line emergency fund, in addition to a fund to cover annual expenses. We have a “Car Repair” fund, where I occasionally dip into for those hard-to-plan-for flat tires, dead batteries, early-summer air conditioner servicing jobs, etc.

We’ve also created a “Christmas Shopping” fund to plan for annual Christmas shopping for our family. This helps to smooth out these large, once or twice a year expenses so as to not upset the budget in the month in they occur.

Around Thanksgiving each year, we make out Christmas shopping list, gather up any coupons and deals we can find, and do our Christmas shopping within the budget established by the balance in the Christmas shopping fund.

We usually just put it all on a credit card for simplicity, and because much of the shopping is done online to score better deals (and because I hate crowded stores!). When the credit card bill arrives in December, we pay it off electronically from the Christmas savings account and avoid the debt hang over that often carried well into the New Year in years past.

What used to be a budget buster, like a car repair or home air conditioner servicing, is now just a blip in the budget in the form of an online transfer and a check for payment of services.

For large emergencies, our larger emergency fund is there. However, psychologically, I enjoy being able to handle smaller emergencies without dipping in the fully-funded emergency fund.


  1. I’m glad you posted this! I used to have a sinking fund set up, but then we moved and I got new bank accounts and haven’t yet set them up. I really need to, Christmas will be here before I know it!

    I don’t have a dedicated sinking fund for each item, but I do have a general fund (called revolving savings) for just that purpose. When we moved 4 months ago and my husband had to quit his job, we had a fairly large sinking fund set up. On just my income, the revolving savings would last us roughly 10-12 months without having to touch a dime of our emergency fund. He’s starting work again this weekend – now it’s time to build the savings back up again!

  2. This was a great read for me! i never thought of saving funds for different categories. I have always just had one emergency fund for ALL emergencies. This is a strategy that I will definitely start doing!

  3. I like this idea and avoiding the unnecessary crunch once a year to cover these large expenses. Instead of setting up a spreadsheet, though, I like to use the goal tools at I just calculate how much I need to save each month for each once/year transaction, add them together, and set that amount as a goal with one dedicated account

  4. I used to use separate savings accounts for this purpose, but there got to be so many items that it was less than optimal. Now I have one account called “Irregular Expenses” and I keep an Excel sheet with a list of the various expenses that should come out of it (i.e. Insurance payments, Xmas, car repairs, computer replacement every 2 years, etc.), the annual amount I estimate spending on each, and the bi-weekly amount I need to deposit each paycheck. As circumstances change, I add/delete/update the items and the corresponding auto-deposit. That way it is one account to manage, one deposit at at time into it, and all the complexity is hidden from me in that Excel sheet (which I review twice a month, on paydays).

    • I used to divvy things up into a gazillion little accounts but found this very frustrating to keep track of. Now make as comprehensive a list as I can at the beginning of the year, divide the total amount required by the number of paycheques in the year and work from there. Yes, there are times when the amount in the account doesn’t cover any given month’s requirements 100% but most of the time the majority is taken care of.

      A number of years ago I started doing the same sort of thing with our rent. Noticed that January that year was a 3 paycheque month so I totalled up the total rent for the entire year and divided it by the number of paycheques for the year then had it auto-deposited in a “Rent” account. It only works if you start in a 3 paycheque month but it works really well–by spreading the cost out this way you actually have a little more to work with on a month to month basis.

  5. I love sinking funds and we use them to help manage our finances. I also use what I call a buffer (a category I set up in the checkbook management software I wrote) where I keep extra money. That way I can pay these extra bills right away while waiting for money transferred from the sinking fund to get transferred to our checking account. These extra funds sure make sleeping at night a lot easier! I know my husband’s blood pressure is way down these days….

  6. After reading this article I got an idea. What about factoring in next years expenses towards Auto insurance, auto registration renewal, auto repair (same as you spent in past year) health insurance co pay (imagine 4 -5 doctor visits and related medicines) etc.

    Then sum it all up, suppose you need $2000 for the whole year. Now divide by number of paychecks and get the money deposited in your sinking fund.

    • Excellent idea – that’s sort of like how I plan for how much money to add to my medical flexible spending account each year when open enrollment for benefit elections rolls around where I work. it could easily apply to many other expenditures, minus the small tax break, of course, that goes with saving a flex spending account.

  7. This is a great idea and I’ve thought of it myself before, but I don’t do it. Here’s why…

    Most of my money is in 1 bank in 1 savings account. I make almost all my purchases on credit cards to earn me free cashback. What is not paid on a credit card is automatically deducted from my savings account.

    Per normal bank regulations, you can only have 6 electronic transactions per savings account per month otherwise it does not qualify as “savings.” The bank will actually convert those accounts to checking accounts and in doing so, you lose your interest rate.

    Does anybody know how to get around this?

    • The rules only apply to withdrawals, not deposits. So you can have as many deposits as you like, and then just withdraw in lumps sums when you’re ready to use the money.

  8. Leave all your money in your one account, but manage it on a “meta” level. Like envelope budgeting only with virtual envelopes. I’ve been doing it for a few years now and it’s working great. There are a couple of budget programs out there that you can use (I like Moneywell) or you can just use a spreadsheet or notebook.

  9. A sinking fund is a great idea. There’s several things you can save in it, like a vacation fund, taxes (especially if you’re self employed) and like you mentioned, an emergency. I like the idea of ING’s subfolders/subaccounts. Might have to give that a try.

  10. I like to call these either just “separate funds” or “emergency funds for my emergency fund”. I’m easily amused, I guess. At any rate I have accounts for taxes, escrow, travel, and appliances/pets. My car registration is like $20 for 2 years, so I can just pay that as it comes 🙂

  11. I’ve always thought something like this is important to have in addition to an emergency fund, to keep you from raiding the account every time you have a bill that’s over and above regular monthly expenses.

    I can see having separete funds, but I think it would be easier to have a single account, that you can call a “large expense fund”, or what ever you prefer (“sinking fund” sounds too accounting-esque!). Also, some employers/payroll companies limit the number of direct deposits you can do and that would limit the number of accounts you can fund without having to write checks.

    Separate accounts might be needed for more occasional expenses like car replacement, expected roof repair, etc.