Are you fed up with holidays sneaking up on you? You’ve finally got back on track after buying endless gifts for birthdays over the last few months and now Christmas is suddenly staring you in the face. You sit there wishing you had started saving earlier in the year, yet again.

Well, there’s a better way to save money for festivities, and other such expenses, and it’s called sinking funds!

With sinking funds, you can save for anything you want. All of those things you really wanted but thought you couldn’t afford without going into debt – you can have them! Be it a newer car, a luxury holiday, a stress-free Christmas, or a new kitchen. All of these things are achievable with sinking funds.

You don’t need to destroy your budget for a large expense. Keep it simple by creating sinking funds. Learn how to get started with this beginners guide.


What are sinking funds?

In its simplest form, a sinking fund is where you regularly set money aside for a certain period of time for a planned expense.

It is a strategic way to save for a planned expense, such as a car or the Christmas holidays and they work hand-in-hand with your budget.

How much you need will depend on your goal. Let’s say that you’re planning to go on holiday in 9 months’ time and the holiday costs £1000. To determine how much money you will need to save, all you do is take the total cost of the holiday and divide it by the number of weeks or months until departure. So, you will need to save £111 each month for the next 9 months in order to have the full amount by the time you leave. No more chucking the holiday on a credit card!

Why you need a sinking fund

Sinking funds can help you save money so that you’ll be able to cover your expenses without having to go into debt or raid your emergency fund.

Typically, a budget covers regular monthly expenses but not larger irregular ones, such as a holiday or car repairs. This is where most budgets fall down, as we can be caught out by these expenses and end up having to borrow money to pay for them.

A sinking fund can help you save for these large and sometimes unplanned expenses by setting aside small amounts every month so that you’ll have enough to pay for them when the time comes.

Benefits of sinking funds

Peace of mind

Knowing that you have almost every expense covered between your budget and sinking fund will bring enormous peace of mind. You can relax, knowing that there won’t be much that can catch you out.

You can save for anything you want

With sinking funds, the things you once thought were out of reach are now firmly within your grasp. All you have to do is come up with a goal and work towards it. Love spa weekends but can’t afford them? No problem – pick a date you want to go, work out how much you need to save monthly and then set up an automatic transfer for that amount into your sinking fund account. You can then relax, knowing that you have it sorted.

Savings and discounts on annual purchases

Many types of insurance providers offer generous discounts for paying in one lump sum as opposed to paying monthly by direct debit. For example, you can save around £60 by paying for your car insurance in full. Most people don’t have £400 just sitting around to pay for their policy in full, meaning that they lose out on the discount. But with some forward-planning, you can have enough ready and waiting in your account to pay it off in one go. Simply save a little each month for this specific goal and when the time comes, you’ll have the money sat there ready and waiting.

Guilt-free spending

I used to suffer terribly with feelings of guilt whenever I bought myself something. I kept thinking that the money I had spent could have been better used elsewhere. Sinking funds get rid of all of that guilt-free spending. The money is there and it has been saved for that specific purpose.

Perfect for those on a tight budget

If you’re on a tight budget there is often very little money left over for any unexpected expenses that pop up. This leaves you vulnerable to debt. By setting aside a little money each month to sinking funds, you will be able to cover these unexpected expenses without any trouble.

Your emergency fund remains intact

You need to keep your emergency fund safe in case life throws you a curveball, such as the roof starting to leak, or your dog needing emergency treatment.

By putting money aside for expenses that you know are coming up, you keep your emergency fund for things that you just couldn’t see coming.

Essential sinking funds

Your sinking funds will naturally fall into three different categories – unexpected expenses, such as a car repair, annual expenses, such as school uniforms, and a planned expense, such as a holiday.

Often, you’ll know exactly how much something will cost and when the money will be needed. However, there will also be times when you won’t know exactly how much the expense will be or when it will be needed.

For example, a couple of years ago, we needed a new boiler. We had known for a while that our current boiler didn’t have long left, so we started a sinking fund for a new one. We only had an approximate idea of how much it would cost and we didn’t know exactly how long it would be until we would need the money, but we started putting money aside for it anyway. When the time came, we were so relieved to have the money sat there to pay for a new boiler in full.

Examples of sinking funds


Below are some examples of sinking funds that you may want to consider. Remember, though, that everyone’s circumstances are different and your sinking funds might be totally different from someone else’s sinking funds.

  • Back to school fund
  • Pet fund
  • Car repairs fund
  • Car insurance fund
  • Holiday fund
  • Home repairs fund
  • Beauty/hair fund
  • Fun money fund
  • Clothing fund
  • Date night fund
  • Christmas Fund
  • Gifts fund

How your sinking funds might look

Let’s say you decide to set aside £400 each month for your sinking funds. The breakdown might look something like this:

  • Holiday – £100
  • Pet – £30
  • School uniform – £20
  • Christmas & birthdays – £100
  • Days out – £50
  • Hair & beauty – £50
  • Home repairs – £50

How to set up a sinking fund

When you are budgeting your money, not only do you need to look at allocating money for regular bills and expenses, you also need to allocate money to your sinking funds.

To work out how much money you need to allocate, you first need to make a list of the sinking funds you want. I suggest making just a few to start off with.

When I started out, I got carried away with myself and had about 12 sinking funds. This was too many and it got too confusing.

Try to stick to saving for things that you usually get caught out by or for something you really want. Car repairs are what usually trip people up. Life is ticking along nicely and then the car needs three new tyres, costing a few hundred pounds. School uniform is another big expense that many people forget to budget for.

Work out how much these things usually cost over the course of a year, or how much you’d like to have saved for such events. Then work out how much you will need to save each month in order to have this much saved by the end of the year. For example, if you’d like to have £500 saved for car repairs by this time next year, you’ll need to set aside £42 each month for your car sinking fund. Do this for each of the sinking fund categories you have.

Now look to see if the total amount needed for your sinking funds is actually affordable. If not, is there any way you can bring in some extra money? You could try a saving challenge or sell some things from around the home that you no longer use. There are also some great ideas on how to make extra money from home in this ebook.

make money ebook

Once you’ve worked out how much you need to save for your sinking funds each month, it’s a good idea to set up a standing order from your bank account to your sinking fund account (we’ll speak about this below) so that you’re not tempted to spend the money. Automate it and treat it as you would any other bill.

Where should I keep my sinking funds?

There are a variety of options when it comes to deciding where to keep your sinking funds. You can keep them in your current account (make sure to keep a note of which money is bill money and which money is sinking fund money), or you could keep them in a separate savings account.

I suggest keeping your sinking funds completely separate from your other money, as it is so easy to get confused with what money is for what.

Certain online bank accounts, such as Starling or Monzo, allow you to save your money in various dedicated pots, which makes things much easier. You can create a savings pot for each of your sinking fund categories. If you sign up to Monzo via my link, Monzo will drop £5 into your account for free!

If you choose to keep them in a savings account as a lump sum, make sure you keep track of how much money you have for each sinking fund, as this will keep you on track and help you to stay motivated. You could just jot it down and keep it somewhere safe, or you could use a dedicated tracker, such as this sinking fund tracker. I find that visual trackers help to keep me super motivated, as I can see my savings grow.

What is the difference between a sinking fund and savings account?

Although a sinking fund and savings account are very similar, there is one key difference – a sinking fund is usually more specific than a savings account.

Your savings are more for building long-term wealth and security or for larger purchases further down the road. The idea is for that money to grow over the years. Sinking funds are meant to be spent. They are for specific expenses or events and are there to prevent you from dipping into your longer-term savings.

What is the difference between a sinking fund and an emergency fund?

Your sinking fund and emergency fund are two very different things. An emergency fund is a sort of safety net. It is money set aside for unplanned or unknown events. Say, for example, you suddenly lost your job. How would you pay for your bills and food? An emergency fund is precisely for this kind of event.

It is generally recommended that you have between 3-6 months’ worth of living expenses saved up for your emergency fund. This should be kept somewhere separate from the rest of your money and it should be easily accessible so that you can access it quickly in the event of an emergency.

Final note

Setting up your sinking funds needn’t be hard. If you are someone who finds that certain expenses keep catching you out and messing up your budget then setting up sinking funds is a great idea.

Remember, for every little bit you put into your sinking fund, that’s less that you’ll potentially need to take from your paycheck and regular bill money. Sinking funds help you to create sound financial habits and help you to stay disciplined.