Sinking funds vs. savings accounts: What to know

Sinking funds and savings accounts can help people manage their finances or prepare for expenses — whether someone is planning a vacation, paying an unexpected bill, or setting money aside for a big-ticket purchase.

These accounts can empower individuals to build a safety net for emergencies and work toward achieving their money goals.

Explore the basics of sinking funds and savings accounts in this article.

Sinking funds

A sinking fund refers to a savings account that is designated for a specific purpose or expense.

Here are some common expenses sinking funds may be used for:

• Car insurance and/or maintenance
• Home repairs
• Holiday gifts
• Travel
• Wedding or event
• Other planned expenses that occur periodically

When someone allocates a portion of their income to a sinking fund, they may be better prepared when these expenses arise, preventing them from dipping into an emergency fund or going into debt.

Potential pros and cons of sinking funds

Here are some possible upsides of putting money in a sinking fund:

• Targeted savings: As a type of savings account, sinking funds allow individuals to save money with a purpose.
• Better budgeting: Sinking funds help create tangible goals, which can serve as motivation to save and budget consistently.
• Avoid debt: By planning ahead and saving for expected costs, individuals can reduce the need to rely on credit cards or loans.

However, there also may be some potential disadvantages to sinking funds:

• Complicated: Managing multiple sinking fund accounts may become time-consuming and confusing.
• Low returns: Money kept in sinking funds may earn minimal interest.
• Temptation: Having money set aside in sinking funds can sometimes tempt individuals to use those funds for non-essential purposes or impulse purchases.

Savings accounts

A savings account allows individuals to deposit and store their money while earning interest. It provides easy access to funds and the potential for modest interest accrual.

These accounts come in various types, including traditional savings accounts and high-yield savings accounts.

Potential pros and cons of savings accounts

Here are some potential benefits of savings accounts:

• Easy access: Savings accounts allow account holders to access their money quickly and conveniently by withdrawing funds through ATMs, online transfers, or in-person visits to a bank. Savings accounts also typically don’t have early withdrawal fees.
• Low risk: Deposits are often insured up to a certain limit by government agencies, providing security.
• Competitive rates: High-yield savings accounts, such as PayPal Savings, may provide competitive interest rates, making them an attractive option for savers looking to earn more on their deposits.

Consider some of the risks associated with savings accounts:

• Fees and charges: Check for monthly maintenance fees, transaction fees, and any other charges associated with the account.
• Minimum balance requirements: Some accounts may require a minimum balance to open or maintain the account.
• Interest rates: While savings accounts are a safe place to hold money, interest rates may vary.

Differences between sinking funds and savings accounts

Savings accounts are where money is stored, while sinking funds provide clarity and intentionality by designating what the money may be used for.

A person may have several savings accounts, each designated as a specific sinking fund. For example, one sinking fund for a honeymoon and another for vehicle expenses like insurance and maintenance.

While a general savings account can achieve a similar outcome, some people may find it difficult to keep track of different savings goals in one account.

Whether putting money away for a vacation, home repairs, or a major purchase, sinking funds and savings accounts can help individuals track their progress and meet their goals.