Sinking funds are used to pay for large expenses that you are planning for. You may use different sinking funds to pay for home repairs, save for a new car, pay for your vacation or to cover large medical bills. By setting the money aside before you use it, you will avoid using your emergency fund unnecessarily, as well as give yourself more negotiating power when it is time to purchase.
You can start by determining which items you want to set sinking funds up for. Then you will need to decide on how much you need in each fund. Then divide that amount by the number of months you have until you make the purchase. Finally you add these amounts into your budget.
You should keep your sinking funds in fairly liquid accounts; a high interest rate money market account would be ideal. Then you simply track how much you have in each sinking fund.
