Have you ever found yourself staring at your savings account wondering where all the money went? Or worse, dipping into your emergency fund for something that wasn’t actually an emergency?
Maybe you got hit with an unexpected car repair, or the holidays snuck up on you again, or you booked a trip and then spent the next three months panicking about how you were going to pay for it.
The problem usually isn’t that we’re not saving. It’s that we’re saving without a system. Everything goes into one pot, and when something comes up, it all starts to blur together. You don’t know what’s spoken for and what’s actually available to you. And before you know it, you’re making financial decisions based on vibes instead of a plan.
That’s exactly the problem that sinking funds solve, and this week on the HerMoney podcast, Jean Chatzky sits down with Sean Pyles, CFP® and host of NerdWallet’s Smart Money podcast, and his co-host, Elizabeth Ayoola, to break the system down.
What Is a Sinking Fund, Exactly?
A sinking fund is a separate, named savings account tied to a specific goal. Instead of one big savings pot you draw from for everything — vacations, car repairs, holiday gifts, emergencies — you have individual buckets, each earmarked for a single purpose.
The appeal, Sean said, is twofold: organization and automation. “Ideally, if you’re doing sinking funds the right way, you have direct deposit into each of these accounts,” he explained. “So you know that you’re making progress on different financial goals simultaneously, which feels really good. You’re seeing that balance grow each month.”
How Many Sinking Funds Do You Actually Need?
Sean currently has six sinking funds, but that number changes depending on where he is in life. He had one specifically for his wedding last year and another for CFP exam expenses the year before. “You can have a sinking fund for a season depending on your needs, and that can change over time,” he said.
He’s also in the early stages of planning a sinking fund for a backyard sauna. “I run a lot. I’m training for a big run around Mount Hood in the Portland, Oregon area. And so my body really feels that. One of the best things to do is simply sit in a sauna afterward.” The estimated price tag is somewhere between $10,000 and $15,000.
As for when someone has gone too far with the number of sinking funds they have, Sean doesn’t suggest a specific number but says to ask yourself whether the system is working for you or if you have so many that it’s creating unnecessary stress or confusion.
Where to Keep Your Sinking Funds
If you’re ready to open your first sinking fund account, Sean says to start with a high-yield savings account. “You’ll be getting a much better return on your money than if you had it in a brick-and-mortar account,” he said. Current yields are running somewhere between 3% and 4%, though he cautions that rates at the higher end may reflect short-term promotional offers.
He also recommends keeping all your sinking fund accounts at the same institution. “It’s so easy nowadays to have multiple accounts. Some banks will even allow you to have fun names on them, so you’re not just trying to memorize the last four digits of your account number,” he said.
Elizabeth agreed: “I have all my sinking funds in the same bank, which is also what made it quick to set up.”
MORE ON HERMONEY:
- The Money Reset: Why September Might Be a Better Time for Financial Resolutions Than January
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- Ask Jean: “I’m Single And Working Class. How Do I Find A Financial Advisor Who’s Right For Me?”
