what is sinking fund

If you’re wondering what is a sinking fund, look no further because I have put together the ultimate guide to sinking guides.

Keep reading to understand what is a sinking fund, what are the best sinking funds categories, how to set it up, and how to manage it.

You’ll be an expert in no time!

What is a sinking fund?

A sinking fund, or a saving pot as we call it in the UK, is money set aside to cover for known upcoming expenses.

Basically, it is a temporary saving fund for something that you know will happen at some point.

You take some money, put them separately from your main bank account, ready to be used when that expense arrives.

Sometimes you know exactly when that will be, and some others you only have a vague idea, but in both cases what’s crystal clear is that it will happen!

So is it just a savings account?

Not really. They can look similar, in the sense that they both are essentially money set aside, however, there are key differences in their purpose.

Savings account provide long term security and the money is not meant to be touched for a long time.

A sinking fund is meant to be used!

Money in it has a clear and specific purpose, we know how much we need, and when we need it by.

So is it the same as an emergency fund?

Not at all.

An emergency fund is a set amount of cash set aside to deal with unexpected expenses: a bereavement, loss of job, or car fault, for example.

The minimum recommended is £/$ 1,000 but it is often suggested to have a few months’ worth of expenses.

Saving £/$ 1,000 in an emergency fund can be intimidating if you’re new to saving. Start with what you feel comfortable with, and build it from there. You can do it.

If you don’t know where to start, check out my post on how to build an emergency fund with no money.

If everything goes well, and in normal circumstances, we never touch an emergency fund.

On the contrary, we are planning to use the money in a sinking fund, and we know when.

Why are sinking funds a good idea?

Sinking funds help you manage your budget.

If you have sinking funds in place (and emergency fund), you will never find yourself out of pocket, and you will have enough money to pay for anything life throws at you.

Sinking funds are a great way to “pay yourself first”, that is to pay the bills, move savings into savings account and any other expense first before spending on non-essential items.

How do you start a sinking fund

Now that you know what is a sinking fund, are you ready to start yours? You won’t regret it!

So there are two ways to do it, one a bit longer but more accurate and the other a bit quicker, but it is more of an estimate.

I’ll walk you through both options, as I know it can feel overwhelming, but don’t get discouraged because it’s something you only have to do once, and it’s definitely not that complicated!

1 – Work out your categories

First of all, you need to define what sinking funds you’ll have – that’s the fun part!

You can find an example of categories below, but let’s say you want to set money aside for Christmas presents and celebrations.

(Great choice, by the way, Christmas can be super expensive, and stressful, with everything going on at the same time!)

You can have as many sinking funds as you want/need.

The more you create, the more your budget will be accurate and you’ll have less to worry about.

2 – Work out the amount you need

This is the only tricky step, I promise.

You need to figure out how much money you need, and you can do that by checking how much you spent last year.

For some expenses, like car maintenance, you could easily check the old bills, but for a Christmas sinking fund you’ll have to find this information elsewhere.

You could check your old bank statements or Amazon receipts in your inbox.

If this is too complicated and you’re getting discouraged, just write down an estimate.

It won’t be super accurate but it’s ok, it’s better than nothing. And next year it won’t be an estimate anymore because you’ll have this year’s data to use!

3 – Set a deadline

When do you need the money by?

For a holiday fund, you won’t need the money the day before you fly, but way before that.  The same would apply for our Christmas sinking fund: we need the money before the 25th December.

You might be a last-minute shopper so your deadline would be early December, or maybe you like to shop early so your deadline would be November or even sooner.

Whatever is best for you, just write it down along with the total amount needed.

4 – Calculate your monthly amount

Now, divide the total amount by the frequency you get paid.

For example, if you need the sinking fund money in 3 months but you get paid weekly, you’ll divide it by 12. If you’re paid monthly, you’ll divide it by 3. Makes sense?

This will give you how much you need to set aside every time you get paid.

Done! You have set up your sinking fund!

… Now you only need to decide where to put the money

How to organise your sinking funds

There is more than one way to organise your sinking funds.

Let’s look together at the various options but remember that they are all good options as long as it works for you.

What matters is that the money is easily accessible. We are not setting aside money to earn interest so don’t worry about that.

All in one

You could keep all your sinking funds into one separate bank account.

This works great if you only have one sinking fund to track, however, if you’re looking to create and fill in multiple funds this could look messy and you might forget how much money you have in each fund.

A simple solution could be setting up a spreadsheet to track the progress and amount of each sinking fund or use

If that’s your preferred choice, you can open a new account with any bank, or open a saving account with easy/immediate access.

One account per sinking fund

This is my preferred option, which is to have one account per sinking fund.

It is a great way to keep things clear and separate. Depending on the bank account you chose, you could easily open new accounts, within minutes.

If you decide to open new accounts with the same bank, the process is extremely quick, and you normally get approved within a day or so. I would highly recommend having all accounts with the same bank so you can see the status of each sinking fund by logging in just once.

Some banks (like Monzo in the UK) let you open as many pots as you want – the dream solution for sinking funds! Pots are just money set aside from the main account, they are not separate bank accounts, but just a way to split your money, which is why this is the dream solution for sinking funds.

Automation or manual

You could set up automations or move money manually, it’s up to you.

Automation removes any thinking from the process, therefore reducing the risk of finding excuses and spending the money instead of putting it in the sinking fund.

However, for some people manually transferring money to the sinking fund could work better, for example if you don’t get paid on the same day each month.

Manually moving money could also work as an extra motivation to keep going. It’s a great feeling to see the total amount in the sinking fund go up.

Sinking fund categories ideas

You could open a sinking fund for literally anything, good things, bad things, things you want but you shouldn’t get and things you have to buy no matter what.

Here are some examples of sinking funds:


what is a sinking fund
  • Home repair
  • Furniture
  • Utilities (if paid quarterly, half yearly or yearly)
  • Deposit for a house
  • Pets cost
  • Car repair/replacement
  • Maternity leave

Events / Seasonal

  • Wedding
  • Back to school
  • Christmas
  • Holiday


  • Season train ticket
  • Clothing/shoes
  • Technology


  • Insurance
  • Doctor visit

Should you have sinking funds if you’re trying to pay off debt?

Absolutely, yes!

Having sinking funds in place will help you manage your budget better, making sure you are not relying on credit cards or other debt solutions to face some of these expenses.

Knowing exactly how much you need to keep your house (and life in general) going, will help you identify how much money you can save and put toward debt repayment.

Furthermore, seeing how much you spend on some of these categories, might give you the push you need to cut down on some of these. It was a real shock when I calculated how much I spent during my innocent and small trips to H&M! Now I only purchase a new item if I really need it.

How to use sinking funds within a budget

This is very simple, just treat them as expenses! In the same way you pay your mortgage or your rent, “pay” your sinking funds.

If you’re working with a zero based budget, write down all your monthly expenses and their amounts (including your sinking funds) and make sure all your monthly income has a purpose. Once you have taken off all your monthly expenses, you should be left with savings, which could go to build your emergency fund or towards debt.

Related: the three steps budget strategy

Final thoughts

Having one or more sinking funds is a no brainer, as they help you manage your monthly income and plan for future expenses.

Once it is set up, staying motivated is the biggest challenge.

If your goal is months away, it is easy to lose inspiration and forget the reason why you’re doing it in the first place.

That’s why I have created a Sinking Fund Tracker!

sinking fund tracker to show what is a sinking fund

Print it, attach it to your fridge or anywhere visible, and colour each box as you get closer to your goal… You’ll stay motivated to reach your goal!

This Tracker is available to download (as well as other free resources!) in my Freebies Library.

To access my Freebies Library, just pop your email address in the box below to receive the password.