A few weeks ago, I shared a simple post about sinking funds. No hot takes. No dramatic opinions. Just a reminder about one of the most foundational money tools we have. And my DMs lit up.

Questions about where the money should go. Whether you’re allowed to have multiple savings accounts. If sinking funds should live inside a TFSA. How does this connect to the RRSP season? Whether this replaces an emergency fund. And, honestly, a lot of “Wait… I thought I understood this, but now I’m not sure.”

That reaction makes sense. The current economic climate has a lot of us feeling like we need to optimize everything at once. We’re hearing about interest rates, contribution limits, savings bonuses, and retirement deadlines. It’s loud. And when things feel loud, even basic concepts can start to feel confusing.

So let’s slow this down. Let’s go back to fundamentals. Because when money feels overwhelming, clarity beats complexity every time.

 

What Is a Sinking Fund?

A sinking fund is a proactive savings strategy for expenses you know are coming. That’s it.

It’s money you intentionally set aside over time for a specific future cost. The keyword here is known. If you can see the expense on the horizon, it’s a candidate for a sinking fund.

Instead of being surprised every December by holiday spending or scrambling when insurance renewals hit, you gradually save small amounts throughout the year. By the time the expense arrives, the money is already waiting.

Sinking funds aren’t about perfection. They’re about reducing friction. They smooth out cash flow so one month doesn’t feel dramatically heavier than the next.

And in uncertain times, smoothing matters.

 

Sinking Fund vs. Emergency Fund

This is one of the most common questions I receive.

An emergency fund is your financial safety net. It’s there for the unexpected: job loss, medical emergencies, urgent car repairs, or anything that genuinely disrupts your stability. It’s protective money. Defensive money. It exists so you don’t have to rely on credit when something unplanned happens.

A sinking fund, on the other hand, is for planned, predictable expenses. Annual insurance premiums. Property taxes. School fees. Vacations. Holiday spending. Home maintenance. These are not emergencies. They’re recurring realities.

When we treat predictable expenses like emergencies, we create unnecessary stress. Sinking funds shift that narrative. They say, “I know this is coming. I’m ready for it.” That psychological shift alone can reduce a lot of money anxiety.

 

What Do You Use a Sinking Fund For?

Sinking funds work best for expenses that are irregular but inevitable.

Think about the costs that don’t happen monthly, but still happen every year. Insurance renewals. Professional dues. Annual subscriptions. Seasonal expenses, especially in climates like ours, include winter tires and heating bills. Back-to-school costs. Summer camps. Holiday travel.

They’re also powerful for lifestyle goals. Travel. Celebrations. Home upgrades. Milestones. The things that make life feel rich but can create stress if they aren’t planned for.

Sinking funds are not just about responsibility. They are about protecting joy. When a trip is fully funded before you leave, it feels different. When holiday spending doesn’t spill into January credit card regret, it feels different.

 

Where Should You Keep Your Sinking Fund?

For short-term goals, generally anything you’ll need within the next one to two years, an interest-bearing savings account is usually the most appropriate place.

The purpose of a sinking fund is stability, not growth. You want your money safe, accessible, and earning some interest while it waits. Personally, I use a high interest savings account (HISA).

It’s important to note that many financial institutions require an initial investment for a HISA (ATB requires an initial $1000 to open a HISA through a Wealth Advisor, for example). If you want an interest-bearing savings account with no minimum investment, many financial institutions offer risk-free options (great for sinking funds because you can open as many as you like and help to beat inflation). The most important part is being able to separate this money from daily spending, while still keeping it available when the time comes. 

The key takeaway is this: short-term money should not be exposed to market volatility. If you need the funds soon, stability matters more than returns.

 

Should a Sinking Fund Be in a TFSA?

A TFSA often enters the conversation because it’s a popular savings vehicle, but it’s important to remember that a TFSA is simply a container. Inside that container, you can hold cash, savings products, or investments.

If you choose to keep cash inside a TFSA, for example, in a savings product, that can work for a sinking fund. However, if you’re investing inside your TFSA, and the goal is short-term, that may not be ideal. Markets fluctuate. A vacation fund shouldn’t rise and fall with the market.

Generally, TFSAs are excellent for medium- to long-term goals where growth is the objective. Sinking funds are about predictability. If you’re unsure which structure makes the most sense for your situation, reviewing contribution room, timelines, and flexibility is a good starting point.

 

What About RRSPs?

RRSPs serve a very different purpose. They are designed for long-term retirement savings and tax planning. Contributions reduce your taxable income today, and withdrawals are taxed later in retirement.

Because of the tax implications and long-term structure, RRSPs are not typically appropriate for short-term savings goals or sinking funds. Pulling money out early can trigger withholding taxes and reduce your contribution room permanently.

Think of RRSPs as future-focused. Sinking funds are present-focused. They solve different problems.

 

How Much Should You Put Into a Sinking Fund?

This is where people tend to overcomplicate things.

Start with the total estimated cost. Then divide by the number of months until you’ll need the money.

If you expect to spend $1,200 on holiday expenses and it’s January, dividing that amount over 12 months means saving $100 per month. That’s it.

The simplicity is the strength. The goal is not to forecast perfectly. It’s to create consistency. Over time, this habit builds confidence because you see yourself meeting planned expenses calmly.

 

How to Set Up a Sinking Fund

Begin by reviewing last year’s spending. Identify predictable annual or seasonal costs. Estimate their totals and determine how far away they are. Break the amount into manageable monthly contributions.

From there, automate. Pre-authorized contributions remove decision fatigue and reduce the chance that the money gets absorbed into everyday spending.

Some people prefer separate savings accounts for each goal. Others prefer one account and track categories internally. There is no single “correct” structure. The right system is the one you’ll actually use consistently.

 

Why This Matters in the Current Climate

When economic headlines feel uncertain, our nervous systems respond. We either want to hoard money, spend impulsively, or freeze entirely. Sinking funds provide structure in the middle of that noise.

They create layers in your financial life. An emergency fund for the unexpected. Sinking funds for predictable expenses. TFSAs for tax-efficient growth. RRSPs for long-term retirement planning. Layering is stability.

Savings do not have to be dramatic to be effective. It does not require perfect timing or perfect forecasting. Often, the most grounded financial move you can make is naming what’s coming and preparing for it steadily.

Start with one sinking fund. Name it. Automate it. Let it quietly build in the background. Sometimes, financial confidence isn’t about doing more. It’s about doing the basics well.