What is a sinking fund and how does it work?

A sinking fund is a strategic way to save money for specific upcoming expenses. Creating a sinking fund can help you plan ahead so that you don’t need to rely on credit cards, or dip into other savings pots. You break saving down into manageable chunks, setting aside a smaller amount of money each month, and you can easily track your progress by saving in one place. 

Depending on your timeline, deposit accounts, demand deposit accounts, or notice accounts could be a good fit for your sinking fund. You may also choose to use a current account that lets you separate money into different pots. Here’s what to consider when choosing where to save for your sinking fund:

• Current accounts may let you separate money into pots which gives a convenient overview, but you will likely earn a smaller amount of interest, or no interest at all.

• Demand deposit accounts are flexible savings accounts, allowing you to add funds and withdraw them whenever you like. They usually offer lower interest rates than deposit accounts, but can be useful for shorter-term saving. 

• Fixed term deposit accounts require you to lock your money away for a set term, and will usually offer a higher interest rate in return. This type of account can be a good option for saving when you have pre-defined goals and don’t need access to your money in the meantime. 

• Notice accounts are another option for longer-term saving. Instead of the account reaching maturity after a fixed term, you simply give a pre-agreed period of notice (such as 30 or 90 days) to withdraw your savings. You may prefer to know that funds are readily accessible or will become available on a certain date when saving for a specific goal.

With Raisin, you can compare savings accounts from over 30 partner banks across Europe with interest rates up to 3.30% AER. Easily spread your money across fixed-interest term deposits and flexible demand deposit accounts, and manage everything with one login.

While a traditional savings account is often a catch-all for your extra cash, a sinking fund is a strategy rather than just a product. You might use a traditional savings account to hold your sinking fund, but the way you manage the money is what makes it different.

• Intent: Traditional savings are often for long-term wealth building or security. A sinking fund has a specific purpose and helps you work towards a pre-defined goal.

• Structure: Instead of saving whatever is left at the end of the month, you calculate exactly what you need to reach your target by a set deadline.

• Accessibility: For general savings, you might want constant access. For a sinking fund, you can choose an account that matches your deadline, such as a fixed term deposit, to earn a specific interest rate while you save.

Sinking funds are most effective when used to manage predictable costs and save towards upcoming expenses. By planning ahead, you stay in control of your budget.

Common examples include:

• Annual expenses: Save monthly for your car insurance, annual tax bills and more to avoid a one-off hit to your finances.

• Life milestones: You could use a dedicated sinking fund to build a deposit for a home. You might also save up for other life events like getting married, having a baby, going to university, or throwing a party for a milestone birthday. 

• Larger purchases and expenses: Whether it’s a new car, home improvement or dream holiday, sinking funds can help you approach purchases with a clear strategy to make them more affordable.

If you own an apartment or live in a managed residential development in Ireland, you will likely encounter a different type of sinking fund that appears on your annual service charge invoice. While they are another way of pooling money, they’re not related to personal sinking fund strategies. 

A sinking fund contribution is collected by the owners' management company (OMC). These funds are pooled together to cover major, long-term maintenance projects for the building or estate.

This might include replacing the roof, upgrading the lifts, or repainting the exterior. Having a well-funded property sinking fund prevents individual owners from facing sudden financial levies when major maintenance is eventually required.

To get started, first identify your specific financial goal and the total cost. Next, determine exactly when you need the money. Finally, divide the total cost by the number of months you have left to save.

Let's look at a practical sinking fund example. Suppose your annual car insurance premium is due in 12 months, and you want to avoid the extra fees associated with paying in monthly instalments.

Sinking fund example: car insurance

• Goal: Annual car insurance premium

• Target amount: €1,200

• Timeline: 12 months

• Calculation: €1,200/12 months = €100 per month

By saving €100 each month, you will have the exact amount ready when your renewal notice arrives.

Once you know your monthly target, you need a place to keep the money. Keeping your sinking fund separate from your everyday current account reduces the temptation to spend it. You can choose an account that suits your timeline, balancing interest rates with flexibility to withdraw your money when you need it. If you open an account where you will earn a fixed amount of interest, you can factor this into your savings as well (taking into account DIRT tax). Please note that DIRT is not deducted automatically by our European partner banks; you must declare and pay this yourself via your annual tax return.

Ready to get organised and start saving for your future expenses? Compare savings accounts and find the right home for your sinking fund.

With our European partner banks, deposits of up to €100,000 per person, per bank are legally protected by the national deposit guarantee scheme of the country where the bank is headquartered, giving you peace of mind while you save.