I use 'sinking funds' to save for major goals, and it's the most effective strategy I've come across (2024)

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• After I graduated from college, I had big financial goals that included paying for an engagement ring, a wedding, and a new car in cash.
• To help me reach those goals, I opened savings accounts and used a concept called "sinking funds" to set aside the money I knew I'd need.
• I've never had to go into debt for a large or unexpected purchase since I started using sinking fund method, aside from taking out a mortgage to buy a home.
• See Business Insider's picks for the best high-yield savings accounts »

When I started my first job out of college, I had big goals. I wanted to avoid debt, when possible, so I could invest for my future.

During my senior year of college, I found myself reading many personal finance blogs. One concept I came across was called "sinking funds." Essentially, sinking funds are buckets of savings set aside for significant expenses you know will come up, even though you may not be sure exactly when they'll come up.

At the time, I had big goals that I knew weren't going to be cheap. The first was to save up $5,000 to put towards an engagement ring and a wedding. The second was having enough cash to purchase my first new car. I didn't know exactly when these things would happen, but I knew they were priorities.

How I set up and automated my sinking funds

The online bank I was using allowed me to set up many savings accounts and give each one a custom name. To help visualize my savings, I created separate accounts for my engagement ring and new car goals and labeled them with my goal names.

Next, I took the money I had already set aside and distributed it into these accounts as I saw fit. I don't remember the specifics of how quickly I wanted to achieve these goals because this was over a decade ago, but I do clearly remember the system I used to determine how much money to put toward each goal.

First, I picked the date I wanted to reach my goal and have my sinking fund full. Next, I divided the remaining amount I needed to save by the number of months until my deadline. This gave me the amount I needed to save each month to reach my goal on time.

Finally, I set up automatic transfers to take place after each payday to fund these accounts. The automation helped me avoid the temptation to use the money I wanted to save for other things.

I used 'extra' funds to accelerate progress

I work to find ways to make my goals happen faster when I really want something. These goals were no different. Whenever I received extra money I wasn't expecting, I'd set aside part of it. Using part of my overtime and bonus checks were common ways I could add hundreds of dollars to these sinking funds.

I'd take any money leftover from underspending in my budget and apply it to these savings accounts, as well. This motivated me to be smart with my money. If I didn't need to spend, I didn't. I knew putting that money in my sinking fund could end up helping me buy my new car sooner.

Ultimately, I ended up taking out a 0.9% APR loan for the car despite having the option to pay cash. I was earning more interest letting my money sit in the sinking fund savings account than the cost of the loan.

How I've used sinking funds more recently

I still use sinking funds today despite being in a much better financial position than I was right out of college. In particular, I use a sinking fund to save up enough money each year to cover my family's health insurance deductible. This way, we're never scrambling for how to pay for medical expenses or making the tough decision to delay treatment because we can't afford it.

We also use sinking funds for major homeownership items. If we know we'll need new appliances, a new air conditioner, or want to upgrade part of our home, we set up a sinking fund. Then, we can pay for these expenses in cash when they come up.