woman fanning out money to determine how much should go in sinking fund categories

Why Sinking Fund Categories May Be the Best Thing for Your Budget

woman looking at money to determine how much should go into sinking fund categories

Are you going over budget because of the miscellaneous expenses that come up each month?

Budgeting is a guessing game.

You simply can not predict every little thing that comes up.

You have to buy a new tire because you had a flat tire on your way to work.

You have to get a new washing machine because the one you have repeatedly stops working in the middle of a load.

Life happens!

But the more times these miscellaneous expenses come, the more it eats into the monthly budget.

And then you go over the budget…yet again!

So what’s the solution?

You need to create sinking fund categories.

Let me walk you through how sinking fund categories can be the best thing for your budget and amplify your savings.

What is a sinking fund?

example of sinking fund categories is the house fund

A sinking fund is money set aside that has a specific purpose.

The money in the sinking fund is for something specific, and the money in it is a targeted goal.

Having multiple sinking fund categories will help you meet certain goals without going into debt. 

Sinking funds are strategic planning so that you can:

Plan for big things and not feel guilty about spending the money

Go on the big trip you have always dreamed of, upgrade to your dream car, or do the home remodel you always wanted to do.

Save for just about anything ahead of time

Save for yearly anniversary trips, a child’s private school tuition, or a school trip your children want to go to next year.  

Prepare for unavoidable expenses

Emergencies will happen, but we do not know when or how.

Related Post: Purpose of Budgeting and How to Use It to Your Advantage

Why do you need sinking fund categories? 

car on fire is an example of why sinking fund categories are necessary

Sinking funds alleviates the unknown circumstances that life brings us. 

It prevents minor emergencies from turning into big crises that may lead you into debt.

When you have sinking funds, things are no longer emergencies. They just become inconveniences.

Once those inconveniences are dealt with, bring the sinking fund back to the original monetary goal. 

Related Post: 7 Things Families Pursuing Financial Independence Do Differently

How do sinking fund categories work? 

woman making a list of sinking fund categories

You name the categories, their purpose, and the monetary goal.  

Every month, you will set aside money that will be sent to the designated category, which will be used in the future for the specified purpose. 

Depending on the category, you may or may not continue contributing to the sinking fund until it meets its monetary goal.  

For example, for vacations, there is no goal.

We continue to contribute $200/month to this fund.

When we plan and pay for a vacation, we go into this fund and transfer money to pay for the vacation.

The value in this sinking fund fluctuates.

However, for our car maintenance fund, the monetary goal is $1,000.

Once we reach the $1,000, we stop funding it.

If the fund is wiped out, we begin making monthly contributions to it again.

We use our tax refund to help replenish (or beef up) our sinking fund categories.

How is a sinking fund different from an emergency fund?

house on fire is an example of why you need sinking fund categories

A sinking fund is a predictable expense that you will need at some point. If you have a car, you need money set aside to maintain it.

An emergency is unpredictable, such as a job loss or stepping outside of the workforce due to medical reasons.

Related Post: 9 Personal Finance Numbers to Master

How to create sinking fund categories? 

1) Name the categories of your sinking fund

family moving is an example of why you need sinking fund categories

What are predictable things in life that can occur? These can be monthly or yearly recurring expenses.  

It can also be a one-time big purchase you are saving for, such as a new car or furniture.

Because we are a military family, PCS (permanent change of station) is a sinking fund.

If you are a military family, you need a PCS sinking fund!

The military only covers so much, and you always end up buying new things for your new house.  

2) Open an account for each sinking fund category

Preferably, open up a High Yield Savings Account (HYSA) at an online bank.

Check out Nerdwallet or Bankrate to compare the latest high yield savings account.

How many sinking fund categories you have will depend on how many accounts you need to make.

Each sinking fund will have its own account number but will not be complicated when you need to report the earnings on the accounts at tax time.

We have our sinking funds in Barclays Online Savings, separate from our everyday bank, USAA.

Keeping our savings out of sight makes us forget that we have a hefty savings account.

Having the extra barrier and the inconvenience of two different banks in different locations prevents us from quickly accessing the money when we do not really need it.  

3) Decide how much you want in each category and when you need it by


How much to put in each category depends on how dependable it is (i.e., the likelihood of it breaking), your lifestyle, how much you value it, and how much you want to put in it.

For example, we have a decent, used van.

Our car maintenance fund is $1,000, which we will use for repairs or new tires if/when needed.

For regular maintenance such as oil changes, we will use our regular budget.

Since the car is in decent shape, there is no need to fund more than $1,000.  

4) Decide how much you need to put aside per month to meet the goal

If you decide you need to have $1,500 in your car fund and would like to have it funded by the end of the year (it is now August), you need to do some simple math. 

$1,500 (money you need) / 4 (number of months to save) = $375 (amount to save each month) 

$1,500 (money you need) / 12 (giving yourself 1 year to meet this goal) = $125 (amount to save each month) 

Depending on your income and goals, the sinking fund categories may be fully funded sooner than later.

5) Set up automatic deposits to your sinking funds and link your everyday used banks

woman on laptop arranging sinking fund categories

Setting up automatic deposits is crucial in successfully using sinking fund categories to your advantage.

Once you set up the automation, no extra work needs to be done, and your savings are already taken care of.

By automating your savings, you are paying yourself first.   

We automate our sinking fund categories to be taken out from our paycheck directly.

Once our money reaches Barclays, it is set up to transfer in their respective categories.

Sinking fund categories you should have:


gift as an example for sinking fund categories

According to this article, Americans were expected to spend $998 on gifts, holiday items, and other expenses during the 2020 holiday season.

A gift sinking fund category is commonly overlooked but should be one of the staples in your sinking fund.

Christmas and birthdays are always predictable every year. There is no reason you could not save for it throughout the year.  

When setting up your gift fund, decide if it is only for Christmas or includes other occasions such as birthdays, graduation, going away gifts, etc.

It will also depend on how many people you usually give to as well. 

We keep our gift fund between $1,000-$1,500. 

Car Maintenance

The Balance states that car maintenance can cost anywhere from $900-$1800 per year depending on if use 10,000 mi/year or 20,000mi/year.  

This maintenance includes oil changes, windshield wiper replacement, new battery, brake pad replacement, and tire rotation/replacement.  

Our car maintenance fund is $1,000.


example of sinking fund categories that you need (ie. house)

According to this article, the costs of homeownership changes significantly depending on where in the United States you live.

On average, American families spend $1,431 a month on recurring home expenses such as mortgage payments, homeowners insurance, HOA fees, and utilities. 

Homeownership is costly. You need a sinking fund if you are a homeowner. 

We are not homeowners yet, but we have a down payment savings fund.

We aren’t sure when we will buy a house, but we will have a hefty downpayment and a sinking fund when we are ready. It is never too early to save!


example of sinking fund categories that you need (ie. vacation)

Million Mile Secrets states that a vacation in 2021 is $581 for a 4-day domestic trip and $3,251 for a 12-day international vacation.

These expenses include food, entertainment, lodging, and transportation.

Vacations are costly, mainly depending on where you are coming from and where you want to go. 

In the past 4 years, we have been able to go on 3-4 family vacations a year.

Living in Japan and having two kids, our family vacations are local.

Our local travels range from $600-$1200 depending on where we are going and for how long. 


example of sinking fund categories that you need (ie. moving)

Move.org states that moving costs vary significantly. A full-service move can range from $550-$12,000 depending on if it is a local move vs. a long-distance move.

If you are a renter who tends to move a lot or consider moving, start a moving fund right away.

The longer you have the moving fund established, the more you have saved for it, and thus, the more options and freedom you will have.  

Our moving fund is $5,000.    

Childcare expenses

example of sinking fund categories that you need (ie. childcare expenses)

According to USDA, the most recent data collected in 2015 show that a middle-income, married couple will spend $233,610 on raising a child through age 17.

Having children is expensive!

You need to consider paying for recreational activities, clothing expenses, tuition (if they go to a private school), school supplies, and so much more.

Creating a sinking fund for these expenses will help alleviate unexpected costs that may come up.

Our kids are very young, so our only expenses thus far are tuition, uniform, and school supplies for one child.

Our childcare expenses fund is $2,000. 

Yearly renewals

example of sinking fund categories that you need (ie. subscriptions)

There are yearly renewals that help you function and make your lives better.

These include subscription services or memberships.

Having a yearly renewal fund prepares you for those annual bills that you tend to forget about.

The sinking fund helps pay off the annual renewals without affecting the monthly budget.

I absolutely hate monthly fees, so if I sign up for a subscription, I will always see if I can pay an annual fee instead.

Our yearly renewal fund is $1,000.

Other sinking funds to consider:


House down payment

Hair salon




Date nights 





Home remodel 

Self-employed taxes


couple looking at the computer deciding on their sinking fund categories

Budgeting is not one size fits all each month!  

You have to plan for the unexpected because that’s how life works.    

Imagine having all these unpredictable expenses come up.

Instead of being stressed out with them, you just say, ok, I’ll pay it! 

The money is sitting there, waiting to be spent on what it’s supposed to be used for. 

Small things are no longer an emergency.

It will take a lot for something to be an actual emergency.  

Start building your sinking categories if you don’t already have one!  

Sinking fund categories will accelerate your Financial Independence journey, so use it as another wealth-building tool.

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