Sinking funds are extremely useful to pay for large, upcoming expenses that would otherwise drain your checking account or require you to borrow.
What is a sinking fund?
A sinking fund is money you’ve set aside for a purchase or expense you know will happen. It is often used for semi-annual or annual expenses, such as vehicle maintenance, holidays or taxes.
The purpose of a sinking fund is that you’ll have saved for an upcoming expense, and it won’t ruin your monthly budget. For example, say you have to pay $1,000 for new tires. If you don’t have that cash on hand, you may have to use a credit card, which can lead to debt and high interest payments. If you had created a sinking fund where you saved $85 each month for a year, you’d have the cash in hand and wouldn’t have to use credit or pull it from your emergency fund to pay for the tires.
Sinking funds vs. emergency funds
Emergency funds are savings designed to cover living expenses in — you guessed it — an emergency. They differ from sinking funds, which are designed and used for a specific upcoming expense. Emergency funds are used as a last resort, and in most cases, these funds are otherwise left alone.
Sinking fund categories and examples
Sinking funds are a practical way to manage your finances and avoid financial strain by setting aside money for a future expense. Some common sinking fund examples include:
The bucketing method is a great and easy way to sort your sinking funds. Bucketing is a simple budget method that separates your savings into “buckets,” each designed for a specific goal. When you get paid, you can allocate a specific dollar amount to be added to each bucket.
You can do the bucketing method with physical cash, such as separating the money into envelopes or jars. The downside of bucketing cash outside of a savings account is that it will not earn interest. If you want to earn interest on your funds, there are savings accounts with bucketing features so you can sort your savings buckets digitally.
4 top accounts for sinking funds
A savings account is one of the best places to put a sinking fund. Savings accounts earn interest through an annual percentage yield (APY), which means your sinking fund will grow passively. The average interest rate for a savings account is
0.46%, according to the FDIC. Plenty of accounts have significantly higher APYs, called high-yield savings accounts.(1)
SoFi Checking and Savings
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Get up to $300 cash bonus with qualifying direct deposit. Terms apply. This offer is available until December 31, 2024.
Not only does SoFi® have high APYs, but it's also a great place to create sinking funds. The SoFi account is a hybrid checking and savings account with no monthly fees, overdraft fees or opening deposit requirements. The savings account can have up to 20 'Money Vaults.' These interest-bearing vaults can have their own goal so you can sort your emergency fund from your sinking funds. Your checking balance can earn up to 0.50% APY with no stipulations, and your savings and vaults can earn from 1.20% APY up to 4.50% APY, depending on deposit activity. SoFi also has a feature called savings round-ups, which rounds each debit card purchase to the nearest dollar and deposits the rounded-up amount into your savings. However, to earn up to 4.50% APY on savings, you must either set up direct deposit or manually deposit at least $5,000 per month.
APY
Up to4.50%
Fee
$0
Minimum deposit to open
$0
Not only does SoFi® have high APYs, but it's also a great place to create sinking funds. The SoFi account is a hybrid checking and savings account with no monthly fees, overdraft fees or opening deposit requirements. The savings account can have up to 20 'Money Vaults.' These interest-bearing vaults can have their own goal so you can sort your emergency fund from your sinking funds. Your checking balance can earn up to 0.50% APY with no stipulations, and your savings and vaults can earn from 1.20% APY up to 4.50% APY, depending on deposit activity. SoFi also has a feature called savings round-ups, which rounds each debit card purchase to the nearest dollar and deposits the rounded-up amount into your savings. However, to earn up to 4.50% APY on savings, you must either set up direct deposit or manually deposit at least $5,000 per month.
Pros
Up to 4.50% APY on savings
Up to 0.50% APY on checking
Create Money Vaults for sinking funds or savings goals
New and existing Checking and Savings members who have not previously enrolled in Direct Deposit with SoFi are eligible to earn a cash bonus when they set up Direct Deposit of at least $1,000 during the Direct Deposit Bonus Period. Cash bonus will be based on the total amount of Direct Deposit. Direct Deposit Promotion begins on 12/7/2023 and will be available through 12/31/24. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A., Member FDIC. SoFi members with Direct Deposit can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. There is no minimum Direct Deposit amount required to qualify for the 4.50% APY for savings (including Vaults). Members without Direct Deposit will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet. Our account fee policy is subject to change at any time. SoFi Bank is a member FDIC and does not provide more than $250,000 of FDIC insurance per legal category of account ownership, as described in the FDIC’s regulations. Any additional FDIC insurance is provided by the SoFi Insured Deposit Program. Deposits may be insured up to $2M through participation in the program. See full terms at SoFi.com/banking/fdic/terms See list of participating banks at SoFi.com/banking/fdic/receivingbanks We’ve partnered with Allpoint to provide you with ATM access at any of the 55,000+ ATMs within the Allpoint network. You will not be charged a fee when using an in-network ATM, however, third-party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.
Get a $50 referral bonus by inviting your friends to join Current. Once the person receives the invite link and makes qualifying deposits of at least $200 within 45 days of opening the account, you and the referred friend each earn $50
Current is a fintech company with bank partners. The Current account is an all-in-one bank account with checking and savings. Current is a great option for creating separate sinking funds since its savings account lets you create up to three separate 'pods' that can each earn 4% savings bonus on balances up to $2,000. The Current account has no monthly or overdraft fees, and the debit card has a points rewards program. There's also a budgeting feature to create spending categories and set up alerts for when you near the category's spending limit. On top of all that, Current offers paycheck advances, a teen bank account and credit-building with its Current Build card. However, Current doesn't support joint bank accounts, and there are no physical branches.
APY
Up to4.00%
Fee
$0
Minimum deposit to open
$0
Current is a fintech company with bank partners. The Current account is an all-in-one bank account with checking and savings. Current is a great option for creating separate sinking funds since its savings account lets you create up to three separate 'pods' that can each earn 4% savings bonus on balances up to $2,000. The Current account has no monthly or overdraft fees, and the debit card has a points rewards program. There's also a budgeting feature to create spending categories and set up alerts for when you near the category's spending limit. On top of all that, Current offers paycheck advances, a teen bank account and credit-building with its Current Build card. However, Current doesn't support joint bank accounts, and there are no physical branches.
Pros
No monthly fees or opening deposit
Up to 4% savings bonus on each pod
Create savings pods for sinking funds and savings goals
Credit-building card and paycheck advances for qualified users
Ally is an online bank. Its Savings Account has a high 4.2% APY with tons of savings features, including the ability to create up to 30 'buckets' to set custom savings goals or create sinking funds. Ally also offers round-ups, automatic transfers and an optional feature called Surprise Savings, which looks for extra money to transfer from your checking to savings automatically. On top of all that, Ally's checking and savings accounts have no monthly fees or opening deposit requirements. But as it's an online bank, there are no physical branches and Ally doesn't accept cash deposits.
APY
4.20%
Fee
$0
Minimum deposit to open
$0
Ally is an online bank. Its Savings Account has a high 4.2% APY with tons of savings features, including the ability to create up to 30 'buckets' to set custom savings goals or create sinking funds. Ally also offers round-ups, automatic transfers and an optional feature called Surprise Savings, which looks for extra money to transfer from your checking to savings automatically. On top of all that, Ally's checking and savings accounts have no monthly fees or opening deposit requirements. But as it's an online bank, there are no physical branches and Ally doesn't accept cash deposits.
Pros
High 4.2% APY
Create up to 30 buckets for goals or sinking funds
Designed for couples, the Ivella savings account has pods to create sinking funds or savings goals. The savings and pods earn up to 5.15% APY. Each pod gets its own routing and account number and a virtual card. To get more than one pod, you'll need a Pods+ subscription for $5 per month, which lets you create up to 500 pods. To earn the high 5.15% APY, you'll either need to set up direct deposit or have the Pods+ subscription. The only real downsides with Ivella are the membership costs of $5 monthly per couple and it doesn't accept cash deposits. But if you don't want the paid membership, the base savings account has no monthly fees, and savings can earn up to 1% APY.
APY
Up to5.15%
Fee
From $0
Designed for couples, the Ivella savings account has pods to create sinking funds or savings goals. The savings and pods earn up to 5.15% APY. Each pod gets its own routing and account number and a virtual card. To get more than one pod, you'll need a Pods+ subscription for $5 per month, which lets you create up to 500 pods. To earn the high 5.15% APY, you'll either need to set up direct deposit or have the Pods+ subscription. The only real downsides with Ivella are the membership costs of $5 monthly per couple and it doesn't accept cash deposits. But if you don't want the paid membership, the base savings account has no monthly fees, and savings can earn up to 1% APY.
Pros
Create up to 500 pods with paid membership
Pods get unique details and virtual cards
Earn up to 5.15% APY
Cons
Paid membership required for more than one pod
Designed for couples
No cash deposits
APY
Up to5.15%
Minimum balance to earn interest
$0
APY
Up to5.15%
Fee
From $0
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Compare more savings accounts for sinking funds
Narrow down top savings account options by monthly fees, APYs and features. For a closer comparison, tick the Compare box on up to four options to see benefits side by side.
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Bottom line
Sinking funds should be kept separate from your emergency fund, if possible. You don’t want to be using your emergency fund for regular expenses, vacations or regular vehicle maintenance. Sinking funds can help by not throwing your monthly budget off. Paying for things like car registration, tuition and Christmas presents out of pocket might require a credit card, which can lead to high-interest debt.
Compare more top savings accounts to securely place your sinking funds.
Frequently asked questions
Are sinking funds worth it?
Sinking funds are a great budgeting tactic and can definitely be worth your time. They are fantastic for expenses like vacations, Christmas gifts, car maintenance or high-cost obligations that would strain a monthly budget. You can integrate your sinking fund goals into your regular budget so when the time comes to use the sinking funds, it doesn’t drain your checking account, you don’t have to borrow and you can leave your emergency fund alone.
Can you have too many sinking funds?
While you can create as many sinking funds as you want, it’s possible to create too many. For example, if you want 10 different sinking funds but can only afford a $10 monthly contribution to each, the sinking funds will grow slowly and may not be large enough to cover the expenses you’re saving for. Additionally, you’ll have to manage all the various sinking funds, which can feel overwhelming.
Figure out your monthly budget to see how many sinking funds you can create. For example, if Christmas is six months away and you want to save $1,000, you’ll need to save around $167 per month. If you still have extra money to afford another sinking fund, you can create another and so on.
Bethany Hickey is the banking editor and personal finance expert at Finder, specializing in banking, lending, insurance, and crypto.
Bethany’s expertise in personal finance has garnered recognition from esteemed media outlets, such as Nasdaq, MSN, Yahoo Finance, GOBankingRates, SuperMoney, AOL and Newsweek. Her articles offer practical financial strategies to Americans, empowering them to make decisions that meet their financial goals. Her past work includes articles on generational spending and saving habits, lending, budgeting and managing debt.
Before joining Finder, she was a content manager where she wrote hundreds of articles and news pieces on auto financing and credit repair for CarsDirect, Auto Credit Express and The Car Connection, among others.
Bethany holds a BA in English from the University of Michigan-Flint, and was poetry editor for the university’s Qua Literary and Fine Arts Magazine. See full bio
Bethany's expertise
Bethany has written 415 Finder guides across topics including:
A compound interest account reinvests your earned interest into your balance. This new balance then continues to earn interest, knowing as compounding.
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