Sinking Funds and Why They'll Be Your Life Raft


It may shock you to find out that saving money is as tough as paying off debt. Like most personal finance plans, saving money takes planning, intention, and dedication.

It’s even more challenging saving money WHILE paying off debt. That doesn’t mean that it’s impossible, and it doesn’t have to be overwhelming. That’s where sinking funds come into play!

In this blog post we:

  • Define what a sinking fund is
  • How they are different from cash envelopes 
  • Show you how to start one
  • Give you options on where to put your various sinking funds
  • Provide tips and tricks on how to be successful at putting away money 

Debt Free in Sunny CA Sinking Funds and Why They'll Be Your Life Raft

What is a sinking fund?

In the throes of debt payoff, it may seem counterintuitive to save money. I know when Josh and I were in Baby Step 2 , we wanted to put all of our income power towards defeating the evil money monster that was our debt. 

I’ll be the first to tell you, that if you don’t SAVE money while paying off debt, you’ll be in for a lousy time. 

Let’s go over what you have when you’re paying off debt:Emergency Fund of $1,000 - $3,000 - depending on what you’re comfortable with.

That’s it.

You’re covered for emergencies, things that pop up which you have zero control over. But what about ‘other’ life ‘stuff?’ 

Birthdays, car registration and routine maintenance, clothing, kids sporting equipment, holidays, property taxes, vet expenses!?  


Debt Free in Sunny CA Amanda Williams


I'm Amanda. My husband and I paid off $133,763 of debt in less than four years! During our journey, I realized what my true passion was in life: helping others become debt free and reach financial independence. You can learn more about us here.

As much as we’d like to pretend the above weren’t expenses we had to worry about, that’s simply not the case. Unfortunately, you can’t JUST pay debt in Baby Step 2. 

Sinking funds, according to Merriam-Webster, is defined as ‘a fund set up and accumulated by usually regular deposits for paying off the principal of a debt when it falls due.’

Let’s take Christmas as an example. 

Christmas is NOT an emergency. December 25th is the same date every year. It shouldn’t surprise you. Yet according to Market Watch, most consumers racked up over $1,000 in credit card debt over the holiday. A shocking 5% of consumers went into debt over $5,000! 

Debt Free in Sunny CA Honeycomb Debt and Savings Tracker

Paying off the minimum balance on that kind of holiday debt will have it lingering for months, or even YEARS after-the-fact. Are you still paying for Christmas? 

That’s not how we do it in the debt free community world. 

How does a Sinking Fund work?

Let’s say we wanted $1,000 to spend for Christmas:

  • I would save $91 per month
          $45 per paycheck
  • Based off of 11 months of saving
          $91 * 11 months = $1,001 

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    Instead of going into debt for a holiday, we have the money on hand to spend.It was planned for, saved for, and intentionally placed into the budget throughout the year.  

    THIS is the magic of sinking funds!

    Where do I keep my sinking fund?

    There are many options for where to put sinking funds, and it’s important to note that there is no right or wrong answer. 

    Capital 360/Ally/High yield savings account

    Unlike traditional banks, these options have a higher interest rate for your savings account. Keeping your sinking funds in these accounts is a safe, smart option. With Capital One 360, you have the option of several savings accounts for your different sinking funds.

    Cash on hand

    Keep your sinking funds in cash. Just remember to keep it in a safe, secure place. To me, this is a riskier option. Having cash around means, I’m more tempted to order pizza, or ‘steal’ a little here and there. If you have the discipline and self-control to keep cash around without spending it, this may be an option for you. If you know the pizza man will get your sinking fund, I suggest putting your money in a bank. 

    One Lump Savings

    If you’re not ready to leave your ‘traditional’ bank (think Wells Fargo, BB&T, Bank of America), you can keep all of your funds in one lump sum. Most do this by having a spreadsheet where all of the specific amounts and funds are laid out.   

    Tips and Tricks to Sinking Funds

    • Figure out how much you need to save for each category. Look up past bills and bank statements. 
    • Stagger them out. You may not need to save for everything all at once.
    • Keep them in a place you’re not tempted to use them.
    • See how much you can save on car insurance, etc by paying upfront in a lump sum.
    • Some sinking funds should wait until you’re out of debt - new car fund, patio furniture, expensive vacations, etc.
    • Don't get crazy with the sinking funds to the point where you don’t have money to pay on debt. Find a happy medium. 

    Have you tried sinking funds? Give it a try and let me know how it goes! 

      About Amanda Williams

      Amanda Williams is owner and founder of Debt Free In Sunny CA: A company inspiring financial literacy and debt free living. Josh and Amanda paid off $133,763 of debt in 3.7 years. She has built a dedicated, engaged, and loyal audience of thousands from the ground up. The #debtfreecommunity hashtag was created under Amanda's direction and has generated an online movement, bringing thousands together on a daily basis.