What is a sinking fund and how do I use one?

A sinking fund is money you set aside regularly in advance for a specific, planned future expense. Unlike an emergency fund for surprises, a sinking fund is for things you know are coming, like car repairs, holiday gifts, a vacation, or annual insurance premiums. To use one, identify the expense and when you need the money, then divide the total by the number of months until then. Set that amount aside each month in a dedicated savings account or envelope. For example, if you want $1,200 for holiday gifts in 12 months, save $100 per month. Many people run multiple sinking funds simultaneously for different goals. This prevents you from going into debt or raiding your emergency fund when predictable big expenses arrive.