What is a sinking fund? How it works & how to start one

A sinking fund is money you set aside gradually to cover a specific, planned future expense.

Imagine this scenario. You breathe a sigh of relief when your paycheck is just enough to cover your mortgage, utilities and even your monthly IRA contribution. Then, on your drive to the store, you get a ticket for an expired vehicle registration you’d been ignoring because money has been tight.

A sinking fund could have helped you avoid this predicament. By saving for your registration renewal ahead of time, you could have covered the cost without disrupting your regular budget—or dipping into your emergency fund for that ticket.

It’s spilled milk now, but you still can prepare for the next expense. Keep reading to learn how a sinking fund works, how it differs from an emergency fund and how to set one up.

Unlike an emergency fund where you’re regularly setting aside money for a rainy day, a sinking fund has a specific objective. When you reach your goal, you pay for that expense. And then you can start over again.

Additionally, you don’t have to stick to one sinking fund at a time. If you have more goals in mind, create savings buckets for those too. Each sinking fund has its own target amount and timeline for spending, which makes it easier to save little by little. If you get paid weekly, biweekly or monthly, just make sure your sinking fund budget doesn’t interfere with your “needs” budget.

A spreadsheet or notebook will help you keep track of each sinking fund, when you’ll add deposits and how much remains after you’ve reached your monetary goal. You also can use a budgeting app or an online money management platform to keep tabs on each fund.

Common sinking fund examples include predictable expenses like your property taxes, which may be due every six months. If you’re self-employed, your quarterly estimated tax payments are another example.

Sinking fund examples are not unpredictable expenses like a sudden transmission failure or tire blowout. Those unexpected costs are generally what your emergency fund is for. But you can use a sinking fund to prepare for predictable expenses, like replacing tires as they wear out.

Starting a sinking fund is as easy as setting up a savings account, only this time, you have a specific amount and a goal in mind.

1. Identify what you're saving for. Start with a predictable expense, such as an annual insurance premium or holiday gifts.
2. Determine how much money you’ll need to save. Estimate the total cost of the expense you’re saving for.
3. Choose where to keep the money. Common options include a separate savings account or a savings bucket within an existing account. (For example, check out Savings Pockets™ from Thrivent Bank.)
4. Set a deadline to reach your total amount.
5. Divide your savings goal by the number of months until that deadline. For example, if you need $600 for an annual insurance premium in six months, you'd set aside $100 per month for that particular expense.
6. Contribute consistently. Consider setting up automatic transfers. Keeping this money separate from everyday spending helps you make sure you have it when you need it.
7. Once the bill comes due, use it as intended.

Keep in mind that your sinking fund isn’t confined to the usual everyday expenses. You can even use it for charitable causes. For example, if you’re interested in donating to a holiday food drive, you can set aside money throughout the year for a local food pantry or holiday meal program. If you started this sinking fund in January and set aside $25 per month, you would have $300 for your sinking-fund goal.

And considering charitable organizations tend to fundraise more money toward the end of the year when donors like you may also be scrambling with your own holiday needs, a sinking fund can help you plan it out better.

The biggest difference between sinking fund savings and emergency savings is whether you can see the expense coming. A sinking fund helps you prepare for planned expenses; emergency savings are for irregular expenses that you didn’t expect.

Because you can anticipate recurring expenses, you can estimate the cost, set a savings goal and work the necessary contributions into your monthly budget.

An emergency fund serves a different purpose. You generally don't know when you'll need it or exactly how much you'll need. You may not even know what you’ll use it for—you just know you’ll need the money for something someday.

According to Bankrate, 37% of U.S. adults have needed to tap into their emergency savings in the past 12 months. Life happens—but saving for planned expenses is a smart way to help protect your emergency fund for when you need it most.

The “best” time to start a sinking fund is immediately after you realize there is a financial goal you need to meet. Even if you start saving small amounts and work your way up, that’s still progress. Additionally, the more time you give yourself to save, the smaller each contribution can be and the less likely you'll be to dip into your emergency fund when the expense comes due.

If you have six months, three months or even one month before the expense, you can still start a sinking fund today. A Thrivent financial advisor can help you work through your sinking fund goals, improve your emergency fund plan or better manage your everyday expenses.