What Are Sinking Funds? And Why Do You Need Them?
Feb 21 | 2025
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Sinking funds are a smart way to stay on track with your savings goals
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I make a lot of promises to myself. Sometimes, the promise is that I’ll wake up and go to the 7 am pilates class I booked when I was feeling much more ambitious. Or that I’ll cook from home instead of ordering takeout after a long day of work. But most often, the promises I make (and inevitably break) are about spending money. More accurately, they’re about not spending money.
“I don’t need any new clothes,” I say. But then I see a new pair of sneakers and immediately decide that I do need them. “I don’t need any more clutter in my house,” I say, and then I buy another trinket at a flea market. Last year, I was looking at my finances to do an end-of-year audit. I looked at my income and then looked at my savings account. Where did all that money go? Then I looked around at my clutter-filled home and realized that instead of saving money or spending it on meaningful, me morable experiences, I’d spent all my money on instant gratification.
Of course, at the beginning of 2024, I’d made all these savings goals. I want to save for a fabulous beach vacation. I want to beef up my rainy day fund. I want to start a business. All of these things had numbers attached to them in my head. But by the end of 2024, I hadn’t reached a single one of my financial goals.
So, I knew something had to change. This year, I made similar savings goals. But determined to reach them, I decided to set up sinking funds. No more letting my goals languish until December. No more mad dashes to save for a vacation when summer was around the corner. No more going into debt for Christmas shopping when I knew I had gifts to buy. This year, I’m living by the phrase: “fail to plan or plan to fail.” And my plan for saving money? Set up sinking funds.
What Are Sinking Funds?
Everyone’s talking about sinking funds online. Despite the term’s vague name and social media buzziness, this is not some fad. Rather, it’s an easy way to set up your finances for success. Do you, like me, wish you could save up for something big without stressing about where the money will come from? That’s exactly what sinking funds are for! They’re piggy banks for grown-ups. Also known as “savings buckets,” sinking funds are savings accounts for specific expenses that you fill up over time. Slow and steady wins the race, as they say.
Here’s how they work. Imagine you want to buy a Dyson Airwrap. This glam hair dryer will run you at least $500. But that doesn’t mean you should put it on credit or Klarna or AfterPay. It also doesn’t mean you should wait for a windfall or put a huge chunk of your paycheck into it. Instead, start a sinking fund. Make a new savings account and put $50 in it each month for ten months. By Christmas, you’ll be styling your hair in voluminous barrel curls without that exorbitant credit card bill. That’s a sinking fund! It’s a way to break down big expenses into smaller, manageable chunks.
The term might sound complicated (and maybe a little nonsensical), but it’s super simple. A sinking fund is just money you set aside regularly for a specific purpose. It’s different from your emergency fund because you’re saving for something planned, not unexpected.
That’s why it’s similar to a piggy bank. Imagine a row of little porcelain piggy banks, each labeled with the goal you have in mind. It’s like in the film Monte Carlo where the heroine has a mason jar with the word “PARIS” taped on the front. Instead of a piggy bank or a glass jar, you have a separate savings account in your bank account that lets you see exactly how much you’ve saved towards your goal.
Are Sinking Funds Worth It?
You might think that starting a sinking fund is unnecessary. Your pride might even get in your way, suggesting “If I want to save money, I’ll just do it.” But ask yourself, when was the last time that worked? To make saving a consistent habit, you must make it easy for yourself in the long term. After all, gradual change is more sustainable than setting big, sweeping goals.
Sinking funds motivate you to save. By setting small goals for yourself — like $20 per paycheck or $50 per month — you give yourself manageable targets that feel good to hit. This creates a positive feedback loop that rewards you for saving. Instead of relying on the dopamine hit of spending money, you get rewarded with a dopamine hit for saving it instead.
Sinking funds don’t just help you save practically; they change your approach to saving. First, they make big purchases feel more achievable and reduce financial stress because you’re prepared. Sinking funds even help you avoid debt by planning ahead — especially with big purchases like yearly insurance bills or Christmas spending. For purchases you know are coming — think membership fees or bills — and purchases you want to make — like vacations or splurge items — your sinking funds make your goals seem closer and money less stressful.
How to Start Your Own Sinking Funds
Starting a sinking fund is easier than you might think. Here’s how to do it:
1. Choose Your Goal: Pick something specific you want to save for. It could be:
– Holiday gifts
– A new phone
– Concert tickets
– Travel plans
– Car repairs
2. Do the Math:
Figure out how much you need to save and by when. If you need $300 in six months, that’s $50 per month. If you have multiple goals, figure out how much of your discretionary income you can put aside each month and split it between them. Maybe $20 to your vacation fund, $20 for Christmas prep, $20 for a designer bag.
3. Open a Sinking Fund Account:
Create a separate savings account or use a completely different app to keep this money away from your regular spending money. Most online banks let you name your sinking fund. That way you can set up multiple but still be clear about your goals. I have sinking funds called “Tokyo 2026” and “New Laptop.” The names also help keep me motivated since I am reminded every time I open my bank account what I’m saving for.
4. Make it Automatic:
Set up automatic transfers on payday so you don’t forget to save. Keep it out of sight, out of mind. While setting up direct deposit might be a little effort upfront, in the long term, it helps keep you on track so you don’t have to give it one thought.
Best Bank Accounts To Start Your Sinking Fund
Not all bank accounts are created equal. Many big banks charge you maintenance fees and fine you for going below a certain limit. On the other hand, many new banks understand their clients’s priorities and pitfalls and make it way easier to reach your goals.
Here are some popular apps and services that can help you manage your sinking funds:
Qapital – qapital.com
Qapital uses behavioral economics principles to “make money management not just easier, but a natural part of your daily life.” You can set up savings for multiple short-term or long-term goals. Saving is fun when you automatically set aside money with certain “rules,” like when you shop or when you go for a run.
Using their Payday Divvy tool, they help you set and forget your biweekly or monthly savings targets. If you have any debt, their Debt Wrangler tool helps you see everything you owe so you can develop a payback strategy. You can also integrate it with your existing bank account, so you don’t have to move banks completely.
The downside is that it comes with a monthly fee, and some users find the rules system a bit complex at first. However, if you’re looking for a fun, gamified way to manage multiple sinking funds, Qapital could be your perfect match.
Acorns – acorns.com
Acorns takes a unique approach to sinking funds by combining saving with investing. Acorns is primarily known for its round-up feature, which rounds up all your purchases to the nearest dollar and sets aside the rest. Acorns offers powerful tools for creating and managing sinking funds through their “Goals” feature.
Acorns will help you get started with investing for long-term goals. It automatically invests your savings in diversified portfolios and provides educational content to help you understand investing. Acorns also partners with selected retailers to give you cash back that goes straight to your investments
Generally, sinking funds are used for short-term expenses. And while Acorns makes it easy to invest, be sure you’re using this tool for long-term goals because money is invested and could fluctuate in value. The monthly fee is also something to consider, but the potential investment returns could offset this cost.
Mint – mint.com
Mint is a comprehensive budgeting tool that excels at helping you manage multiple sinking funds within your larger financial scheme. As a free service, it’s a fantastic way to get started on your financial journey. If you’re overwhelmed with your finances, Mint provides an overview of your balances and transactions. You can set spending targets and start sinking funds all in the app. It also keeps you updated on your progress and complete integration with your existing bank accounts.
With Mint, you can budget your sinking funds into your spending plan and give you a detailed spending analysis to help find extra money for your funds. The main drawback is that Mint doesn’t hold your money — it just helps you track it. You’ll need to maintain separate savings accounts for your sinking funds. However, its comprehensive financial overview makes it an excellent tool for managing multiple saving goals alongside your regular budget.
RocketMoney – rocketmoney.com
RocketMoney brings a fresh approach to sinking funds by combining them with bill management and subscription tracking. It’s particularly good at helping you find extra money for your sinking funds by identifying areas where you might be overspending.
If you pay for the premium version, it even includes bill negotiation services so you can save on regular expenses and automatic subscription cancel tools. With the money you save monthly, you can put aside that extra to your sinking funds.
