Definition
Sinking Fund
A sinking fund is money you set aside regularly to pay for a known, planned future expense, so the cost does not hit your budget all at once.
Instead of borrowing or scrambling when a big predictable bill arrives — annual insurance premiums, a car replacement, a wedding, home repairs, or school fees — you save small amounts toward it each month in a separate pot. By the time the expense is due, the fund covers it, avoiding debt and stress.
A sinking fund differs from an emergency fund: it is for expected, scheduled costs, not surprises. For irregular but foreseeable expenses, keeping the money in a liquid or short-term debt fund earns a little return while staying accessible, and the discipline prevents these lump sums from derailing your monthly finances.
Related terms
- Emergency FundAn emergency fund is a readily accessible reserve of cash set aside to cover several months of essential expenses, protecting against income loss or unexpected costs.
- Goal-Based PlanningGoal-based planning is an approach that ties every investment to a specific life goal — a home, a child's education, retirement — with its own timeline, target amount and strategy.
- Contingency PlanningContingency planning is preparing financially for unexpected shocks — job loss, medical emergencies, disability or death — so they do not derail your long-term goals.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.