What Is a Sinking Fund, and Why Does Dave Ramsey Recommend One?

If you don't have a sinking fund, you probably should.

It's important to have the right types of financial accounts so you can make smart choices about where your money goes. For example, having money in an emergency fund in a high-yield savings account will ensure that you do not end up in debt when you face unexpected expenses.

Sometimes, though, it can be difficult to determine exactly what kinds of accounts you need. For example, finance guru Dave Ramsey has recommended a sinking fund, but many people don't know what that is or why one would be required.

Here's why Dave Ramsey thinks you need a sinking fund

To understand why Dave Ramsey thinks that you need a sinking fund, it's helpful to understand what a sinking fund actually is.

According to the Ramsey Solutions blog, "A sinking fund is where you save a little bit of money every single month for something specific. So, anytime you have a known expense coming up, you can use a sinking fund to save up for it over time."

Ramsey gives the example of a new furniture purchase that you set aside a few hundred dollars per month for until you have the money to pay for it in cash outright rather than borrowing for it. But you can actually have a sinking fund -- or several sinking funds -- for a few different things running from a vacation you plan to take to a fund that will pay for summer camp for your kids.

As Ramsey explains, a sinking fund is different from an emergency fund, because the purpose of it is to prepare for expected expenses that you are going to incur soon. And he believes it is important to have one because it makes big purchases easier to pay for without having to borrow.

How to start your sinking fund

Ramsey suggests saving a little bit of money each month in your sinking fund, and it's a good idea to do that since chances are you'll always have some short-term goals that you're saving up for.

He also advises keeping the money in a savings account so it is accessible when you need it and so you don't have to worry about meeting minimum balance requirements or facing losses from investing. Or he said you could just keep the money in your checking account as long as you keep track of it, but this is much more likely to lead to the funds being spent on other things.

To decide how much to put into your sinking fund, think about what your goals are, how much it would take in order to accomplish them, and what your timeline is. If you want to buy a $1,000 appliance in five months, for example, that would mean you'd aim to put $200 per month into the account.

If you want to maximize the chances of being successful at saving for each goal, you may actually want to have a dedicated account for each one you're putting money towards. That way you can track your progress more easily and make sure that your sinking fund will provide the funds you need for the purchases you want to make.