What are Sinking Funds and How to Open Your First One

Posted Feb 23, 2021 | Chris Petrie

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Have you ever had a big expense pop up in your life and you thought to yourself — I wish I would have had money to pay for that?

But since you didn’t have the money on hand and you needed to make the expense, chances are you went into debt. Maybe this was for a car, or a home repair, new furniture, or possibly even a vacation?

Sinking funds solve this problem.

What is a Sinking Fund

what is a sinking fund

The term sinking fund actually comes from the real estate world. For example, let’s say a group of real estate investors come together and buy a large apartment complex. When they buy the complex, they are told there is a brand new roof on the apartment, however the roof will need to be replaced in 10 years at a cost of $1 million.

The investors don’t want to get 10 years down the road and have to decide how to pay for million dollar roof, so instead they set up a sinking fund. They take $1 million and break it down into $8,333/month for the next 10 years and save it into a savings account what they refer to as a sinking fund.

Sinking Funds are a fancy name for individual savings accounts that you automate to save for life’s bigger expenses.

Now we can apply this same mentality to our personal finances. Let’s use a Christmas for example

Every year we know Christmas comes right after Thanksgiving and right before the New Year. And without fail, people will go into debt over the holidays simply because Christmas “snuck up on them” and they didn’t have any extra money to spend over the holidays.

Has this happened to you too?

Now what if we decided we would plan ahead for the next Christmas using a sinking fund? Instead of waiting for Thanksgiving dinner to digest and then going into instant freak-out mode for the next 30 days, we instead opened up our Christmas Fund.

And since we know we spend $1,200 every year at Christmas, we decide to automatically deposit $100 every month into our sinking fund at an online bank earning us 20x higher interest than the big banks. Now when Christmas comes, we don’t go into freak-out mode and instead transfer over the $1,200 cash we had been automatically saving each month for the past year.

How much better would that feel?

Why Online Banks?

Online banks will allow you to set up multiple sinking funds (really just savings accounts) with no minimum balance to maintain and no hidden fees. They also pay our 20x higher interest rates than a traditional brick and mortar bank and you have the same protection on your savings offered by any other traditional in-branch bank.

For example, if you were to save $10,000 in a savings account at one of the mega banks, the national average for savings rates is 0.09% APY or $9 per year. But, if you chose an online bank such as CIT Bank, you would earn 0.85% APY on your $10,000, which earns you $175 per year.

Both the mega banks and online banks are all FDIC insured and offer the same protection for your money. However, since CIT Bank is an online bank, they don’t have to pay for all the overhead that comes with multiple branches, staffing, and other costs — and those savings are passed onto you.

Earn More With Your Savings – CIT Savings currently offers a 0.85% APY on with their CIT Savings Builder. To qualify for the 0.85% APY, simply open a savings account with a minimum of $100 and continue to deposit $100/month — CIT Savings Builder is a perfect bank for your next sinking fund.

Why Sinking Funds Work So Well

Sinking funds work so well because you’re not waiting for life to happen to you and then trying to figure out how to pay for it. Instead, you are planning for the unexpected and ensuring you have cash on hand before you actually need it.

They are Proactive

According to the book 7 Habits of Highly Successful People by Stephen Covey, the number one habit of highly successful people is that they are proactive. They don’t wait for life to happen to them, instead they happen to life.

When you plan ahead and open a sinking fund for a future expense, you’re being proactive with your life and money. This is exactly what the financial world doesn’t want you be. 

Credit Cards are Reactive

If being proactive is a habit of the highly successful, then the opposite must also be true. Credit cards (when not used properly) are reactive. Any time you have an unexpected expense and you don’t have the money, you end up going into debt using your credit card. 

And if you think about it, the worst time to go into debt at any interest rate is when you don’t have money. This is why so many people carry balances on their credit cards. You need them when you don’t have any money and then the (high) interest keeps you in their system for longer than you expected.

Seven Sinking Funds You Can Start With

The sky is the limit when it comes to sinking funds. There are no right or wrong funds to start with, but if you need some help on getting started, here are seven you may want to consider first.

1. Emergency Fund

This one may seem obvious, but did you know 6 out of 10 people cannot write a check for a $1,000 emergency today? An emergency fund is the first sinking fun I recommend because it’s the first layer of defense to going back into debt.

Instead of waiting for an emergency to happen and then going into debt, start an emergency sinking fund. Next time an emergency happens you won’t have to worry. You will instead just write a check and go on with your day.

2. Vacation Fund

If you long for a trip to paradise but don’t think you’ll ever be able to afford it, a sinking fund could be the way you can finally fulfill that dream. Once you are able to meet your monthly financial needs, you can start putting a little “extra” money aside at the end of each month.

Another option is to fund your vacation sinking fund throughout the month whenever you notice a surplus in your bank account or if you earn a little extra cash. The idea is that putting it into your sinking fund right away will prevent you from spending it on some other type of splurge in the meantime.

3. New Car or Car Repair Fund

Often people don’t think about saving for a new vehicle until their current one is beginning to show some age or wear and tear. However, at that point it is nearly too late. The time to begin saving for a new car is immediately after buying one. A new car sinking fund will also be able to help you prevent a future car payment

The average monthly car payment is $482. If you made this payment into your sinking fund for 20 months, you would have almost $10k to buy another car. This is why proactive people use them.

Saving for repairs on your car, new or old, is also a good idea that could prevent you from having to go into debt debt in order to fix your main mode of transportation.

4. Christmas & Birthdays Gifts Fund

This is one account you may have thought of right away when we first mentioned sinking funds because so many people have seen ideas on Pinterest and other social media channels that suggest you save a certain amount each week to end up with a tidy sum by Christmas for gifts.

But instead of socking cash away in a drawer or a jar, why not let it build interest and add up more quickly in your sinking fund savings account? Plus you’ll be less tempted to dig in there and “borrow” some to pay for something other than what your sinking fund is meant for.

5. Home Repair or New Appliance Fund

Even if you don’t take vacations, don’t have a car, and don’t celebrate holidays with many gifts, you might still need this sinking fund. Just about everyone has been hit with unexpected repair bills from a refrigerator that suddenly stops working, or a washing machine that quits. So you call a repair person and get it fixed, or purchase a new one.

But, where does that fit into your monthly budget? The answer is “nowhere” unless you’ve been saving for it in a sinking fund. Even those who rent instead of owning a home will likely have to shell out for new things around their home once in awhile, so a sinking fund for household repairs and upgrades is still a good idea for renters.

6. Medical Co-pay Fund

Unless you have been asleep for the past few years, you are surely aware of the rising costs of medical care. Not only are medical facilities and pharmacies charging more than ever before, but insurance premiums are going up as well. A sinking fund could be a way to save for the co-pay and/or deductible from an unexpected medical bill you might experience.

You never know when you’ll have to have an emergency surgery or end up going into the critical care clinic when you get sick on the weekend. Having money saved in a sinking fund will at least allow you some peace of mind so you can focus on your health instead of how to pay for these unexpected expenses.

7.  Down Payment Fund

If you’re getting ready to buy a house or make a large purchase, a healthy down payment up front will always save you the most money.  Determine the amount of down payment you’re going to need and then decide on how long it will be until you need it. 

For example, if you’re getting ready to buy a $250,000 home and want to put down 20% to avoid paying private mortgage insurance, then you know you’ll need $50,000. If you’re 5 years away from buying a home, then you would set up a sinking fund and transfer $833/month into your new sinking fund.

Other (un)Common Sinking Funds

Chances are you are unique and amazing in your own special way, so why not set up a sinking fund for what makes you different? Here is a list of unique funds that may fit into your life as well. And, don’t you be judging just yet..these are ones I have actually seen inside our money coaching program.

  • Travel Home Fund
  • Party Fund
  • Weightlifting Supplement Fund
  • Diet/Weightloss Fund
  • Breast Augmentation Fund
  • Beer Brewing Fund
  • New Pool Fund
  • Hunting
  • Vegas Fund
  • Concert Fund
  • (Online) Dating Fund
  • New Kitchen Fund

These are just some ideas for different things you could open sinking funds for, however the seven listed above are a great place to start.

I’m sure you have other ideas going through your mind right now as well. But regardless of the reason or name of your fund, you should start a sinking fund or two today and create a plan for the expected-unexpected.

How to Start a Sinking Fund

Starting a sinking fund is easy. But, your sinking fund must be at a different bank than your regular checking or savings account. 


Because if you’re sinking funds are sitting next to your checking account, you just may want to rob some of your automatic savings into your checking account. Keep your sinking funds at a separate bank, earn higher interest, and don’t be tempted to rob yourself of your a savings each month.

Step 1: Open a Savings Builder Account

Head over to CIT Bank and open a Savings Builder Account. It will take 5-7 minutes to open the account and you can easily connect your current checking account (or any account for that matter) to your new savings builder account.

Some banks will make two small deposits into your account and make you wait 3 days to confirm, but CIT Savings does have an instant verification option.

Also, it’s important to know that you will not have a hard pull on your credit when opening a CIT Savings Builder. If you’re worried about your credit or you’re trying to rebuild your credit, CIT bank does not do a hard pull when opening a savings account.

Lastly, you can also nickname each of the accounts you set up. You may want to have one emergency fund and then one vacation.

Step 2: Fund Your Account ($100 minimum)

Now, it’s time to save your first $100. This is the minimum initial deposit to open a Savings Builder account. And, it also means you earn one of the highest interest rates in online banking.

You can fund your account by digitally linking to your current account. Or, you can mail a paper check to CIT Bank.

Step 3: Setup Recurring Deposits

Most online banks, including CIT Bank, will pay out interest in a tiered system. 

For example, most online banks pay up to the highest rate they advertise based on account balance. And if you’re account balance is less than $25,000, then you’re not going to actually earn the highest rate advertised. However, the reason why I love CIT Savings Builder for sinking funds is they will pay their highest rate of 1.75% on your balance when you continue to deposit a minimum of $100/month into your sinking fund (savings account).

If you’re a W-2 employee and you are paid on a schedule, you may want to consider setting up direct deposit into your new sinking fund. You can do this by contacting your employer (or going online) and setting up direct deposit using the routing number and account number for each of your new sinking funds.

Step 4: Create More Sinking Funds

Start with one sinking fund, but over time you’re going to want to create more. The best time to create a new sinking fund is when you realize you needed money and you didn’t save for it. Instead of letting history repeat itself, create a sinking fund and ensure you have money in the bank before you need it.

Step 5: Withdraw Your Cash to Pay the Bill

Sinking funds are not checking accounts — they are savings accounts. They are not to be used for daily withdrawals, but instead to be used for large expenses. With that said, you definitely have access to your sinking funds but it’s not immediate and that’s for a reason. 

The first rule to stopping a bad habit — like never saving enough money — is to make the trigger invisible.

This is why you don’t want to open up a sinking fund at your everyday bank. When you don’t see your savings every time you login to your everyday bank, you’re much less likely to steal the savings from yourself.

The second rule to stopping a bad habit is to make it difficult.

Whenever you transfer money from one bank to another, there is a 3-5 day ACH transfer through the automated clearing house. This happens with all transfers between different banking institutions and this is a good thing. The 3-5 delay is the part of erasing a bad habit by making it difficult. 

Although not too difficult, big purchases should be made with planning instead of knee-jerk reactions. Even emergencies don’t have to be paid right this second. Not matter what you’re saving for in your sinking fund, it’s best to wait for 3 -5 days before you actually spend the money.

Use Sinking Funds to Save Money

Did you know if you chose to change your monthly payment into an annual payment, you can often save a lot of money?

A great example is with auto insurance. Almost all auto insurance companies will give you a break on your annual premium if you pay them all up front instead of paying them each month.

Call your insurance agent and ask if you can save money by moving to an annual payment plan. Then take that annual premium and divide it out into 12 monthly payments. Open up a sinking fund, nickname it insurance fund, and make the monthly payment to yourself.

The Best Place to Keep Your Sinking Fund

Ideally, you should always open your sinking funds in a high-yield bank account. These accounts charge zero fees and earn the most interest.

Since you might be keeping your money in these accounts for at least a year, earning the most interest possible is a no-brainer. Online banks also make it easy to transfer or schedule payments when need access to your savings.

Brick-and-mortar banks pay on average 0.09% APY for your deposits. For a $10,000 deposit, you earn $9 in interest each year. And if you pay monthly account fees, you’re actually paying the bank to keep your money for you. In this case, you are actually better keeping your cash under your mattress.

Right now CIT Savings Builder pays 0.85% APY when you open an account with $100 and maintain $100/monthly deposit OR a $25,000 balance. Also, unlike brick-and-mortar banks, online banks don’t charge you monthly hidden fees.

Do Not Use CDs for Sinking Funds

Also, don’t put your sinking funds into a CD. Even if it has a higher interest rate. The reason why is that your money is untouchable for the entire CD term. So, if you choose a 12-month CD, you can’t withdraw your cash for 12 months penalty-free. And, since you’re saving monthly, you open a new CD each month.

One year from now, you have 12 different funds for one savings goals with 12 different maturity dates. With a regular savings account, all your cash stays in one account.

Tips to Fund Your Sinking Fund

At first, it can be difficult to find money for your sinking fund. Especially if you’re living paycheck to paycheck or have a variable income. There are a few ways to find money for your sinking fund each month.

Transfer Money From Your Checking Account

After all, your checking account is a giant slush fund that pays all your bills. As bills come in, you pay them. At the end of the month, you either keep the extra money in your account. Or, you transfer it to your savings account.

Since your checking account is probably your most active bank account, start here. Only keep enough money in your checking account to pay your regular monthly bills. And, enough surplus cash to avoid overdraft fees.

Here are two other reasons not to keep extra money in your checking account:

  • You might spend it instead of saving it
  • Most checking accounts don’t earn interest

If you have extra money left over each month, transfer this cash into your sinking fund each month.

Even if you have a variable income, you can use this trick to cash flow your sinking fund.

Divide Your Paycheck Into Sinking Fund Categories

Some people divide their entire paycheck into different sinking fund categories. You can even do this for your regular monthly expenses like utilities or your cell phone bill. This can force you to stick to your spending plan each month.

To keep it simple, you can also make sinking funds for your disposable income. That’s any cash left over after your monthly bills, investing, and charity giving.

Instead of just having your money sit in a savings account earning interest, give it a purpose. Not only does your cash earn interest. But, you now have more motivation to save more cash each month.

So you don’t accidentally spend this money, schedule the transfer on each payday. Most employers now use direct deposit to pay you. It takes a few minutes to setup automatic transfers.

Start a Side Hustle

Looking at your current checking account balance and paystubs are the two easiest places to start. After all, you’re improving on what you already have. No extra time or effort is required.

One of the next best options is to boost your income with a side hustle.

If you don’t need the extra cash to pay off high interest debt or topping off your emergency fund, put it in your sinking fund. And, don’t be afraid to also contribute your regular day job income into these sinking funds too.

Whether you freelance online or you drive for Uber, you can earn cash in your free time. Although putting your earnings in a sinking fund doesn’t give instant gratification, you reap larger benefits when you need to tap your sinking fund.

Reduce Spending and Save the Difference

Another way to put more cash into your sinking fund is to spend less money. Most of us can cut spending in some category each month. It can be cooking more meals at home, ditching cable tv, or something in between. Then bank your savings with a sinking fund.

When Sinking Funds Are Good

Sinking funds are good for saving for those large planned expenses. You know they’re coming, but you don’t know exactly when. For example, you might use sinking funds for any expense that’s at least three months from now. Or, even a really large expense that’s five years away like buying a house is a perfect sinking fund.

These are the advantages of having sinking funds:

  • Focus your savings on specific expenses
  • Reduce the risk of being reactive and going into debt
  • Prevents you from accidentally spending too much each month

When Sinking Funds Aren’t the Best Option

Sinking funds are great, but they’re not always the best way to save money. For example, you shouldn’t use them for long-term goals like saving for retirement.

For retirement savings, it’s best to invest in places like M-1 Finance or Betterment. Retirement is long-term savings for your later years in life — not for your next vacation.

Another great long-term investment would be crowdfunded real estate that can earn up to 12.4% per year versus 1.75% per year. You have decades to build a nest egg and investing helps you earn passive income that outpaces inflation.

  • Savings accounts don’t have the highest passive income potential investment
  • Must have a fully funded emergency fund before you can fund your sinking fund
  • Must choose a fee-free bank account to maximize sinking fund earnings


Sinking funds are quick and easy to start. Take the 5-7 minutes and open up your first sinking fund today.

Don’t let yourself run into the problem of needing money right now and not having it. Instead of going into debt and paying high interest, become proactive and earn interest.

Chris Peach Author 150x150

Chris Petrie

Chris (Peach) Petrie is a personal finance expert, money coach, speaker and podcaster.

In 2011, Chris and his family were exhausted from living paycheck-to-paycheck and facing a mountain of debt. They started going against the society standards of misbehaving with money and made the decision to take back control of their lives and money. Within seven months they paid off $52,000, started saving like crazy and began building real wealth.

The word spread fast and Chris started showing friends how to create a budget over dinner. Soon after he started showing their friends how to do the same and eventually Chris started teaching personal finance classes around the community. As the need for the classes grew, Chris launched Money Peach in 2015.

Money Peach was created to help everyday people remove the stress and fear of money by showing them how to save more, make more, and keep more of their money.

Chris Peach has been featured in places like Business Insider, The Huffington Post, Elite Daily, and CheddarTV.

When Chris isn’t at “work” he can be found at the Crossfit gym or riding on the fire truck — Chris is also a full-time firefighter in Phoenix, Arizona.


  • Car insurance; I pay in full every 6 months and a sinking fund makes it manageable

    • That’s a great example of a sinking fund that can help you with budgeting for large expenses. Awesome!

    • Nice work CarolJ. A great way to save and manage your insurance premium 🙂

  • Hi Peach! My husband and I are still planning on hiring you once his work picks up and we have the funds to do so, and let me tell you we can’t wait. I’m so done being broke haha! But anyways, since I have no idea how all of this works, how many accounts do financially responsible people have? And is it good to have them all in one bank? I always wonder how to save up for certain things but I didn’t know if having multiple accounts was what people did lol. Thank you, love your blog and read it everyday!

    • Hi Amanda! There isn’t a set number of Sinking Funds because everyone will always be a little different. We have 9 right now, but I have coached people with only 1-2 and some with 10+.
      The biggest take-away here is to have enough for you to simplify your savings so when ______ comes up, you have money for it. What are some things you can think of right now that are 100% coming up that will hurt your budget? Start there 🙂

  • We don’t call ours sinking funds, but we have used targeted savings accounts for a lot of different things in the past. Right now we are working on moving, which is something we set up a special savings account for a few months ago and started funneling money into. Now we are so glad we had that money put away for our move.

    • A “Moving Fund” is another Perfect Fund Cat!
      Where are you moving to? 🙂

  • A few ideas for sinking funds that we plan to open (just starting this whole thing!) are:
    1.Tax fund- My husband is in land sales and a 1099 employee so we need to set aside our taxes from each paycheck.
    2. Weddings Fund- I’m one of 33 first cousins so you be knowin’ wedding season is every season round here and we need to have money for travel and gifts.
    3. Boat fund- Because we will most likely be selling our current one to pay off debt and would like to have another in the future! 🙂

    • Those are great examples of sinking funds. A tax savings fund is one that I have too. 🙂

    • Hannah, I’m excited for your family! You are both taking incredible amounts of action towards your own financial goals and the future looks incredibly bright for you. It has been great working with you 1 on 1 and I can’t wait to see what is next for you both !

  • I have never heard of the phrase ‘sinking fund’ before, however we do use funds. We have * funds; an emergency car repairs fund, christmas fund, anniversary fund, holiday fund, new iPhone fund and bless others fund.

  • Does Capital One still have the subcategories under 1 checking or savings account? I heard they got rid of that.

  • Been doing this for years. Built an Excel Monthly Budget back during my pre-retirement days and I am still using it 7 years into retirement. Health Care, Appliance replacement, Car Insurance(including Deductible built in), Rent, car payments, and last but not least a “Fun Fund”. Remember, no robbing Peter to pay Paul!


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