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Sinking funds and why you NEED them

Within the future there are expenses you will want to plan for to ensure as few emergencies occur as possible.

There may also be bigger long term goals that you are working towards.

A new car or solar panels for your roof. Really it could be anything.

But to buy it your going to have to save up for it to avoid going into debt.

What is a sinking fund?

A sinking fund is a savings pot that you contribute regular amounts to because you have a mid-to-long term savings goal. It is there to prevent delving into your emergency fund as that money is for the unknown. 

It is more specific than a savings account as you know how much you are going to save and what you are going to spend it on rather than just putting money away until you need it. 

Here is an example

You want to save £2,400 for a deposit for a rental flat and you want to be able to do it in one year.

£2,400 = 12 x £200

So you could achieve this goal in 12 months by saving £200 a month

Why have a sinking fund?

It is important to have a sinking fund as to avoid emergencies and dipping into your emergency fund.

You should have a sinking fund for car and home repairs as these are things you know will at some point need repair.

It can also be good to have sinking funds for other expenses such as back to school, birthdays and Christmas.

We use sinking funds for several goals

  • Annual, Bi-Annaul and Quarterly Bills  (we have an account for gas and electric which don't come out monthly so we set up a standing order to go out each month).
  • Vacation fund (we used this when saving for our vacation this summer though it is currently empty, when we start planning our honeymoon we will use this again).
  • House deposit- C and I are currently saving for a deposit on a house and this is by far the longest term goal of our sinking funds.
  • Bar exam- I have been saving for the past few years towards the cost of my bar exam this is also a longer term savings goal. 

Where to keep your sinking fund?

You want to keep your money somewhere where you are not going to easily touch it, but conversely it needs to be easy to access in case of an emergency. 

When determining the account look at what your sinking fund is for. Is it for a goal where you are going to have a good period of notice before needing to withdraw such as a deposit fund. 

Or would it be a fund where you would need immediate access in case of emergency such as a car repair fund. 

With that in mind you have a couple of options
  • Cash- If your prefer to use cash envelopes consider setting up envelopes for your sinking funds. This will provide you with the quickest access if you need it (but be aware of the temptation to spend the money). Also remember cash earns no interest so if you sinking fund goal is longer term consider the impact of this. 
  • Easy access E-savings accounts- This give you instant access- we use the ones attached to the Lloyds bank account for our car fund, bills fund and vacation fund. This is by far the best option as it provides the greatest level of flexibility and means it is easy to transfer money in and out. Plus a small amount of interest will be earned whilst there is almost no risk (as its likely to be covered by the FSCS)
  • Premium Bonds- These give you 3-5 working days access and we use this for some of the bar exam money and house deposit money.
  • Peer to Peer (P2P) lending- These accounts have 30 days to access and we use this for the remainder of the bar exam and house deposit money. But remember this is higher risk investment.

Disease Called Debt


  1. We have a couple different ones. The only one we're tapping into right now is for my husband to get his Master's degree. I wouldn't want this money to come out of savings or our e-fund, so we earmark a portion of each check for it. We started the fund before he joined the program, and now we're kind of in a "pay as you go" situation. It's working well. No debt and a (small) salary increase when he finishes!

  2. Great tips Rebecca thank you for sharing. We should really manage our personal finances just as businesses do. Most businesses have sinking funds for different goals or objectives.

    I have never tried th Peer to Peer (P2P) lending, I will definitely be giving it a go.

  3. This is a great idea especially for people living on a tight budget--you know those expenses are coming; now plan for them!

  4. This is a fantastic idea. I do not know many people that have a budget like this but if many did, it would help them out of lots of sticky situations. You never know when something may occur. Having a backup is always great.