How to Create Sinking Funds

by Staff Writer

A different kind of sink

One of the best methods I have applied to my budget is the sinking fund.

A sinking fund can best be described as a pool of money that is set aside to cover future payments.

Think of it as a piggy bank that you put money into and when the time comes you get to smash the little piggy and use the money you’ve been saving. Sinking funds can be used for all sorts of expenses; taxes, insurance, big-ticket items, and even utilities.

My Sinking Funds

I personally have 8 sinking funds included in my budget to cover a range of expenses. Below is a list of all my ING Direct accounts.

list of ING Direct sinking funds

Most of these accounts are sinking funds. The housing fund includes the mortgage and taxes. I have a set amount of money I put in the fund every pay check. The money will sit there until each lender comes and draws their payments from the account. The taxes are paid twice a year and the money accumulates until needed.

The most useful sinking fund I have is my utilities fund. My cell phone, cable, internet, electricity, gas, and water are all included in this fund.

It has completely taken away ANY worry I have about the raise and fall of my utilities. It was pretty easy to set up and has been on auto pilot for almost a year now with zero interaction from me. I just transfer the same amount of money into the accout every pay period and that’s that.

Set Up a Sinking Fund

You’ll need to figure out what you want the fund to do. We’ll use a utility sinking fund for this example. The fund will hold the money for our cable/internet, electricity, household gas, water, and cell phones. The simplest way to start is to gather the cable/internet and cell phone bills.

These bills do not change much during the year. I suggest using a sheet layed out like the one below. 12 months across the top and the utility down the side. Plug in the payments for the cable/internet and cell phone bills. Next you need to pull out the gas, water, and electricity bills.

Most of these include the amount charged over the past 12 months. If they don’t, you can access all the information online at each provider’s website. Plug in the numbers for the past year. You need to use the previous years amount because they will give the best overall picture of how your house uses energy and how it changes during the seasons.

sinking fund

Once you have all the payments entered into the sheet you can sum the columns and see what it looks like. You can sum by month to get the total cost for each month, notice how it changes. You can sum by utility to see how much you spend each year, shocking I know. The last column on the right is the average per month for each utility, with the total amount averaged at the bottom. This is the amount you need to set aside every month to cover the bills.

I’m sure you’ve noticed that the total amount you need to set aside does not cover some of the month’s payments. Over time this will even out with some months being below the average and some above. This is where you can tailor the amount to provide protection from the ups and downs.

If you started this plan in February you’d overdraft the account. You can put a one time extra payment into the account to solve this problem. Dump and extra $150 in for this month and then scale back to $395 for the rest of the year. You’ll notice to that in July the number goes up quite a bit.

By putting the $395 into the fund from March until July you will have an excess of $226 sitting there to cover the extra needed in July (air conditioning costs a lot). Then the utilities drop down again, rebuilding for the next spike.

I’m a little more cautious when dealing with money these days. I will take the $395 and round up to $450 and deposit that amount every month. The extra money will build up the fund so that you never have to worry about how it is tracking.

If at some point you notice the fund is getting too much money it, you can pull some out to use for something more meaningful. The point is to always cover the expenses so your budget doesn’t get bounced around from month to month.

By using sinking funds, my budget is on autopilot and almost nothing changes from month to month. I LOVE Sinking Funds. They make the my financial life so simple.

Do you use sinking funds? Do you have a better way to cover these expenses? Please let me know, I’m always looking for the best ideas to use.

Photo By Andrew Mason


Paul February 9, 2010 at

Great post Jeff and thanks for the link. We’ve operated using the sinking fund system in our budget for the last year and it’s incredibly powerful. Christmas paid for entirely out of our sinking fund. Car maintenance and on and on. Combined with your budget these are the very backbones of a sound financial plan.

Jeffrey Kosola February 9, 2010 at

Great point, “The very backbones of a sound financial plan”. I believe the same thing. The sinking has made sticking a budget very easy for us. Another advantage is the ability to self escrow taxes and insurance. I prefer to hold my money instead on the mortgage company so I think this benefit helps a lot. Of yeah, Christmas is a piece of cake with a sinking fund. That’s how I paid for last Christmas too.

Monevator February 9, 2010 at

I like the concept, though I prefer to keep one big sinking fund — my current (checking, in US terms?) account!

Be careful that by having a sinking fund for, say, utilities, you’re not being complacent about the charges you pay. Having to find the money for the bill each month at least keeps you focused on what you’re paying.

Jeffrey Kosola February 9, 2010 at

HaHa the one big sinking fund. That’s funny.

Your are correct, without looking at the bills and watching the usage you can end up over paying. I tend to watch our energy usage more than most. I don’t have any cool gadgets that do the monitoring I just use common sense. I also monitor my meters weekly to see how much I’m using, dorky I know. I even wrote a post about it away back. This post gets many hits a day from our friend Mr. Google. It seems that a lot of people are looking for ways to monitor there usage.

How to monitor household gas usage

Thanks for reminding us not to get complacent.

Ben February 9, 2010 at

Okay, you sold me. I just opened my electric orange account…now, just have to figure out how many savings accounts I need!

Jeffrey Kosola February 9, 2010 at

Good for you Ben,

I love ING and I’m sure you will too. I’ve had the same funds listed in the post for almost a year now. I love them. I wish you the best of luck setting up your system. I’m an engineer by day so I LOVE systems 🙂

Forest February 9, 2010 at

I love this idea… I need a sinking fund for a visit to see my best mate in New Zealand….. I’ll call it a travel fund, and I need one to pay my debt management plan.. I guess if I put $50 or so more in a month that will help over time.

Jeffrey Kosola February 9, 2010 at

Yes sir, it will work great for a trip to New Zealand. One way to think about a sinking fund is to imagine a reverse credit card. Instead of charging a trip to New Zealand and then paying the minimum payments on the card until it’s paid off. You make minimum payments to your sinking fund and then cash it out to pay for the trip 🙂

Mrs. Money February 9, 2010 at

Jeff! I think I love you. This is SUCH a great idea! I like this way of budgeting much better than anything I have seen. This is totally something I can do! Thanks for sharing!

Jeffrey Kosola February 9, 2010 at

Wow, I had no idea 🙂 I’m really glad you like the sinking fund. It has made my money life much easier. I hope you try it!!!

Little House February 11, 2010 at

I love that you can setup sub-accounts with ING. I think your sinking fund is a great idea, now if only I could get organized enough to open an account!

Jeffrey Kosola February 12, 2010 at

It’s only takes a few minutes to open an account. If your interested in ING I’ll sent you a referal good for an extra $25 for you. Good luck with getting organized. By the way, I notice you took a bike ride yesterday. Biking is my only hobby besides blogging 🙂

Brad Chaffee February 11, 2010 at

Hey Jeff, you did a great job here man! I think sinking funds are such an important key to successful budgeting.

I have a question. I have an ING Savings account and I was wondering if you had multiple accounts or was there something they let you do to budget out your savings account to go for specific expenses?

Sinking funds rock dude! I have been loving your articles lately man. Keep it up! Tonight I happen to be on a commenting rampage, since I have neglected all of my good friends over the past few months.

Have a rockin Friday bro!

Jeffrey Kosola February 12, 2010 at

Hey Brad,

The accounts listed in the post are all my ING accounts. Each one is a different account. The beauty of the system is that I pay bills from each seperate account. The utilities companies get the info for the utility account and they can only draft from that account. The 1st and 2nd mortgages are only drafted from the Housing account and so on. Like I told Little House, if you want an extra $25 for a new account I’ll sent you the referal. You have too much on your plate not to set something like it up. It’s awesome for busy dudes like us.

“BuzzLightYear to the rescue” How many times have you heard that lately? I’m up to 75 time a day now 🙂

H Lee D February 15, 2010 at

This was a very useful post – thanks! Our electricity provider has an option to pay equal payments year round once you’ve been in your dwelling for a year — same idea, except they have the money and I don’t, but it makes monthly budgeting super-easy.

Jeffrey Kosola February 16, 2010 at

The problem with the equal payments is that at the end of year they will hit you with one large payment to make up any difference in total useage for that year. Sometimes people will get money back, but mostly you’ll get charged. That one time hit can really hurt a budget. I think setting up a sinking fund with your bank is a much simplier plan and like you say, you have control.

H Lee D February 16, 2010 at

True, but that’s not a problem we’ve ever had. We monitor statements to see where we are and consistently come in the same or under the previous year.

And if you have a sinking fund that all utilities are taken out of, it doesn’t matter, but it does make it easier to budget for one.

Jeffrey Kosola February 16, 2010 at

I’m glad it’s worked for you. I’ve had family memebers that it hasn’t worked out so well. Of course I’m sure they weren’t watching the statements like you are.

Just like all things money, if you don’t watch it closely and tell the money where to go it will end up going down the drain 🙂

Have a great Paczki day

Trina February 17, 2010 at

Hi Jeff
Great post. I am so jealous of all of your different accounts…you are uber organized!! I love it! I have always heard of this type of fund as a Freedom Account from Mary Hunt’s books. I tried it a couple of years ago with all of our yearly bills (HOA, car tabs, etc) and I just couldn’t wrap my head around it…at least with only one BofA account, the different ING accounts would have been a better move.
Anyhoo, this year I am trying a ‘baby step’ to sinking funds if you will. I have a file box in the office with 20 tabs (4 for the kids, 4 for hubby, 4 for me and 8 family tabs). I put $10 a month into each section and I can’t tell you how happy I am with this little system after only 2 months. It feels so great if a girlfriend calls me up and invites me and the kidlets to a museum and lunch and I’m able to reach in the box and have $20 bucks ready to go, ear marked in the kids’ event admission and mom’s lunch tabs.
I do recognize the possible perils of having a literal box of cash in my house (fire, not earning interest) but for now this works for us and helps me enjoy spending money on the little things in life.

Jeffrey Kosola February 17, 2010 at

I believe you are the uber organized one. A box with multiple tabs, that’s way more organized than me. I just found it simpler to set up these accounts as sinking funds and only allowing the companies to touch those accounts. I’m usually very busy and don’t have/make the time to perform the tasks manually. I get emails of all my statements and review them the minute I get it. I look for changes in the usage and payment as signs of problems.

If the file box is working good, I would stick with it. Nobody manages money the same and any hacks that work for you are GREAT!! Keep up your great work.

Dave July 4, 2011 at

Great post. One thing to consider is that Capitalone has purchased ING and I bet they will screw it up like they did to Chevy Chase Bank. Time to look for another ING substitute.

Have a great 4th!


mak February 19, 2012 at

Hi Jeffrey,
I just stumbled on this after searching sinking funds. I recently learned about them in my math class, (they are much more lovely in my math books with examples of 6% interest over 20 years etc. lol) but my question is this…… I am on a very tight budget. If I were to use your utility example as my own I would need to deposit 395 dollars per month into the account. What about the current months payment…. and the fact that 395.00 extra on top of my bills will overdraw my paychecks. When do you start using the money to pay the utility company for example?-right away, a year after starting the fund? And if you pay right away from the fund how does it accumulate? If you wait the full year to pay the utility company from this account then how do people pay the current amount and also build up the sinking fund? I am a little confused on that area.
Hope this blog still exists.

vbaker May 2, 2012 at

isnt’ this like an emergency fund??

mary May 4, 2012 at

Love the lesson. Will definitely help alleviate anxiety I have with a single account and lots of transactions buzzing around. This will also prevent unexpected charges from overdrawing the main account. Will start with current month as I get paid then will put a little extra in with hopes of always paying this months bills from last month’s money. That would be some financial peace! Btw, I like perkstreet better than ING.

Mccauley July 4, 2012 at

Many thanks conveying this statement and making it public

Ashley October 28, 2012 at

I just called ING and they said you can’t set up bill pay from your savings account like Jeff says up top. To me it sounds like he is saying he has his utilities in a savings account and puts money in them, then they are withdrawn each month since he is on “auto pilot” and doesn’t have to do anything with the account. ING says you can only transfer money between your own accounts so why put money in a savings account each month when you have to pay those utility bills the same month. Am I mistaken about what Jeff is saying?

Rick January 22, 2013 at

Interesting concept but you are still making a monthly payment whether you have a sinking fund or not. I believe sinking funds are more useful in saving for specific big ticket items such as appliances, cars, home downpayments, vacations, etc.

Andy Vuko February 23, 2013 at

Hello! thank you for the GREAT information on sinking funds. I have been directed to ING by several sources online, but all are before being bought out by Capital One 360. Would you still recommend setting up sinking funds under the new management or going elsewhere?


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Chelsii March 22, 2014 at

I’m a little confused. I’m new to the whole budgeting thing and I just need more clarification. Is the money that you put into the sinking fund an additional amount for those bills monthly versus the amount that you are already paying for those bills monthly?

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