Sinking funds: saving for big expenses
A sinking fund is money you set aside a little at a time for a known, upcoming expense — the opposite of scrambling when the bill arrives. It's how you turn a scary lump-sum cost into a manageable monthly habit, and it keeps predictable expenses off your credit card.
What a sinking fund is (and isn't)
A sinking fund is for planned, expected costs: annual property tax, car insurance paid yearly, the holidays, a vacation, a new laptop, or a future car. You know it's coming and roughly what it'll cost — you just save for it in advance.
That makes it different from an emergency fund, which is for the unexpected. Many people keep several small sinking funds alongside one emergency fund.
Keep reading: Where to keep your savings · High-interest savings accounts. For the official rules, see CDIC — your coverage.
How to set one up
Estimate the total cost and the date you'll need it. Divide the cost by the number of months until then — that's your monthly contribution.
For example, a $1,200 expense needed in 12 months is $100 per month. Automate that transfer into a savings account earmarked for the goal.
Many online banks let you open multiple free savings accounts or 'buckets,' so you can keep each goal visually separate without opening accounts at different banks.
Where to keep the money
Keep sinking funds in a high-interest savings account so the money stays liquid and earns a little while it waits. For a large goal more than a year out, a GIC maturing near the date you need the cash can earn more.
Frequently asked
How many sinking funds should I have?
As many as you find useful — common ones are car, travel, gifts/holidays, and annual bills. The point is clarity, so don't create so many that you lose track.
Can I use a TFSA for a sinking fund?
Yes, holding a high-interest savings product in a TFSA keeps the interest tax-free. Just remember TFSA withdrawal room is only restored the following calendar year.
Sources
General information for Canadian readers, not individualized financial, tax or investment advice. Figures reflect the date reviewed; confirm current limits and rules with the CRA or a qualified professional before acting.