Americans are generally doing a lousy job of saving money for the future.

According to data from, 58% of Americans have less than $1,000 in savings in 2019. Even more alarming, over 31% of Americans have absolutely no cash stashed away in savings, a scenario that could lead to serious household upheaval if a financial emergency occurred.

Why are we, as a nation, so sub-par when it comes to accumulating adequate financial savings? Surely, income limitations and rising household expenditures, like cable, internet and cell phones, which our parents and grandparents surely didn't have, play a big role.

But there's another reason Americans don't save money - we don't have enough good strategies (outside of automatic savings accounts and old-fashioned discipline) to use to save money on a regular basis.

What Is a Sinking Fund?

That's a where a sinking fund comes in. A sinking fund is a household/personal savings fund than enables consumers to save an incremental (or more) amount of money every month - but for a specific targeted expenditure.

People usually use sinking funds to save a for a particular, big-ticket item, like a major household appliance, a new set of tires for the family vehicle, or for a vacation.

Sinking funds are usually designated for use at certain times of the year, with the Christmas holidays, the summer travel season, and family birthdays and graduation or wedding days (for example) all high on the list of targeted sinking fund strategy dates on the household calendar. Back-to-school dates are also a favorite target of parents.

The term "sinking fund" itself doesn't seem to have any direct lineage.

That said, in 18th-century England, bankers were reportedly using the term "sinking fund" to describe the slow, regular repayments of a loan or debt, with the payments "sinking" the amount of money owed.

How Do Sinking Funds Work?

Sinking funds offer a multitude of benefits.

In particular, they allow you to spend for a big-ticket item, like a trip to Hawaii, in a guilt-free manner. Hey, you've diligently saved for months on end, and made the sinking fund an integral part of your household budget. So go ahead and enjoy Maui for two weeks - you've earned it.

But what's the best way to leverage a sinking account to save for that beach vacation? Here's a blueprint that will get you on that plane to paradise, or to any long-term savings target that involves a sinking fund.

Set a Savings Goal

The advantage of saving for a known term, like a new back yard patio or a dream vacation to Hawaii, is that you generally know (or should know) how much you'll need to cover the cost.

If you're saving $4,000 for a Maui vacation, all you need to do is some simple math to get the job done. By saving $200 a month for 20 months, you can generally count in getting on a plane Hawaii on your terms, and at your preferred time frame.

Establish an Automatic Savings Mechanism

Virtually any bank will take money out of your account automatically, via your paycheck or other large deposit, and will apply it to a special savings account that's geared toward a fixed, future expenditure.

After a while, you won't even notice the money is being taken out of your checking account and popped into a separate sinking fund account. Ask your bank details on automatic savings for a sinking fund.

Split Your Sinking Fund Into 2 (or More) Separate Accounts

There's no reason why you can't use a sinking fund to save for two targeted expenses, as long as you're diligent about the accounting aspects.

For instance, let's say you're saving for a trip to Hawaii ($4,000) and for a new backyard patio ($2,000) simultaneously. The trick is to account for the two savings goals every month. You split the account into, say, $150 for the Hawaii vacation and $150 for the new patio, into the same account, making sure you regularly track the savings accumulation for each targeted cost.

At year's end, you'll have $1,800 for both the beach trip and the family patio, and are well on the way to meeting your sinking fund goals.

Many banks and credit unions will allow you to open multiple savings accounts, as well. That way, you can easily use a sinking fund to save for more than one large expenditure at a time.

Is a Sinking Fund Like an Emergency Savings Fund or Savings Account?

In a word, no, a sinking fund is not the same as an emergency fund, or a traditional savings account, for that matter.

Here's why.

A sinking fund is a savings fund that is geared toward a designated purchase, at a designated price range.

  •  For example, a sinking fund can be created to save for a $1,000 set of premium golf clubs or $2,500 for high-end granite counter tops for the family kitchen. In that regard, sinking funds are designed for "known" financial costs.
  •  A sinking fund can also be placed into any savings vehicle - like a bank savings or checking account, or even a piggy bank.
  •  A sinking fund is designed to hit full capacity and withdrawn just as the money needed to pay for the targeted expenditure is needed.

An emergency fund, while also a great savings idea, is different than a sinking fund.

  •  It's for "unknowable" costs, like for emergency repairs on the family SUV or in case a household breadwinner loses his or her job.
  •  An emergency fund is specifically designed to accumulate living expenses over a period of time - say, three or six months.
  •  An emergency fund needs to be immediately accessible if needed. Thus, stick market accounts or bank certificate of deposit accounts with early withdraw issues should be avoided.

Remember, there's no "emergency" in a household's sinking fund - it's for a known, non-emergency expense. Consequently, it's a good idea to set aside money for both household savings funds, if possible.

Doing so guarantees income needed for both known and unknown expenses.

An emergency fund and a sinking fund aren't exactly like a traditional savings fund, either.

A bank savings account is the jack-of-all-trades of savings accounts.

  •  It's used to save money for both known and unknown expenses, and can also be used as a "spillover" bank account that can be used to shore up a bank checking account that begins to run dry.
  •  By steering money from a savings account into a low-funds checking account, the banking consumer can avoid any overdraft fees that could be incurred on a bank checking account with low funds.

Why Are Sinking Funds Important?

Sinking funds are a savvy way to save for known expenditures.

By giving you, the household saver, a target cash amount to aim at with regular intervals, you have a steady and reliable way to accumulate the cash, and sink the amount remaining to be saved, in a highly user-friendly way.

Sinking funds can also be used for unidentified expenditures, even though you know you'll need the money down the road. In a way, they're like an insurance policy, as you know you'll need money for a college graduation present or to replace an aging household appliance down the road.

By using a sinking fund, you're also taking the use of a credit card or personal loan out of the equation, thus saving you the headache of paying back the credit or loan, with interest.

For example, let's say you have an older home with a driveway that's clearly cracking and in increasing disrepair. It's not an emergency - the driveway is still usable and nobody's going to pop a tire using it.

By using a sinking fund, you can slowly save the needed $3,000 to fully repair or replace the pockmarked driveway, on your time and at your household's savings pace.

The same goes for any known or expected future expense. As long you as you're not in an emergency situation, taking the time to build up savings over a longer period of time at a comfortable pace - without using a credit card or loan - is a legitimate win-win for American savers.

The Takeaway on Sinking Funds

Sinking funds are a steady and dependable way to save for big expected household expenditure, at your leisure, and at your pace.

If you're disciplined about making regular contributions to a sinking fund, it's an easy, guilt-free way to save for something you really want - on your unique terms.

It's never too late - or too early - to plan and invest for the retirement you deserve. Get more information and a free trial subscription toTheStreet's Retirement Dailyto learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? We've got answers.