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You’ve probably heard about keeping an emergency savings account for all of life’s surprises. While putting money away for a rainy day is always a good idea, you might also want an account dedicated to expenses you know are coming. That’s where a sinking fund might come in handy.

The term “sinking fund” is frequently used by businesses to refer to money set aside to pay off debt or a bond. In essence, it is money saved for a specific purpose.

You may have a sinking fund and not even know it. If you have a separate holiday expense account, you already have the basic idea of a sinking fund.

Why a Sinking Fund?

There are many reasons why you may want to set up a sinking fund. You are probably familiar with a monthly budget and how you might use a checking account to cover your routine expenses: groceries, food, utilities, rent or mortgage, and the like. But what about expenses you anticipate in the near future?

A sinking fund is helpful when you want to keep your finances organized. It can be a great place to store funds you know you will spend eventually without disrupting your budget. Think of it as a hybrid of your checking account and emergency savings: money you know you’ll spend, just not immediately or frequently.

Sinking funds are a great way to set aside money so you aren’t tempted to overspend. For instance, it can keep your emergency fund from being used for trivial things. They are also very flexible. You might want to have a sinking fund for irregular expenses, such as:

• School Supplies and Textbooks
• Semi-Annual Insurance Bills
• Quarterly or Annual Subscriptions
• Holidays or Vacations
• Upcoming Medical Procedures

Setting the Fund Up 

If this is your first time setting up a sinking fund, you might wonder what type of savings vehicle would work best. Financial institutions offer many different savings and checking accounts, so having a baseline of features in mind might help narrow the search.

Look for a checking or savings account that doesn’t charge monthly fees or fees for making transfers. This ensures you don’t spend more money than needed when pulling from your fund. While it isn’t absolutely necessary, you might find it convenient to choose an account that includes a debit card or checkbook. An account with no required minimum balance is also helpful.

Since you’ll be pulling from your sinking fund irregularly, consider a vehicle like the money market savings account. These savings vehicles can pay higher dividends than a standard checking account, potentially making your savings work harder until they’re needed.

After opening your new sinking fund, give it a name. Labeling your accounts will remind you of their purpose, making it more likely that you will use them as intended.

Keeping the Fund Ship-Shape

Now it’s time to incorporate the sinking fund into your spending strategy. In other words, it’s time to revise your budget. One way to use the sinking fund is to define a savings goal and treat it like a monthly expense.

For example, let’s say you set the fund up to cover car insurance costs, which you know are billed twice a year. Take the anticipated cost of the bill and divide it by six. The result will reflect how much you’ll want to contribute to the fund each month. A $600 bill, for instance, means you will be putting away $100 per month.

Another advantage of the sinking fund is that it can provide a fresh perspective on your expenses. As noted above, instead of seeing a large lump sum with a looming due date, it is possible to break down the cost into smaller, more manageable chunks.

The sinking fund is a powerful tool that allows you to budget more effectively. Try it out on a big, upcoming expense and see if it fits with your lifestyle.