How I Afford To Travel So Much (Hint: Think Sinking Funds)!

Sinking Funds

A question I get very often is “How can you afford to travel so much?”. In 2018 we travelled to Dubai, New York, Marrakech, The Netherlands and locally around Ireland. The answer…..

Sinking funds!

Ok, so this needs a catchier name than ‘Sinking Funds’ (add it to the to-do list) because let’s be honest… it sounds boring, but stick with me because they are a game changer when it comes to budgeting for irregular costs. Now I don’t claim to have invented sinking funds but I do think that everyone should know about them, so I’m spreading the word.

So in a nut shell… well actually an example would explain it better. Let’s say I want to go on holidays in 12 months time and it is going to cost me €2,400. Instead of putting it on a credit card or trying to come up with this money the month it is due, which for most of us (me included) would really mess up my budget for a number of months, especially if there was an unexpected expense or another large outgoing that month, you divide the annual amount (or projected annual amount plus a bit of fat just in case…) by 12 or the number of months until the expense is due (€2,400/12 = €200) and this is the amount you deposit monthly… and here’s the important part… into a separate account. This way it is not mixed up with the rest of your money, there is no risk of you “accidentally” spending it and you can always see the amount built up to date in this fund.

I open online deposit accounts with my bank so I can see all my sinking funds and balances in one place. These are standing line items in my budget every single month.

Another essential element of sinking funds is to automate the transfer each month, I use standing orders so I can’t change my mind or intervene at any point. When the time comes and the expense falls due, there is no panic, you simply transfer the amount to your current account and pay it out. No stress. It’s that easy.

8 Simple Steps to Stinking Funds

1: Identify item and amount (if amount is not known, project an amount)

2: Divide the amount by the amount of months until the expense is due

3: Create a line item in your budget for this expense

4: Open a separate deposit account for this item (be careful if it is a “notice” account where you are required to give X days notice before making a withdrawal, another point of caution is to make sure there are no bank fess/charges associated with this account)

5: Set up a Standing Order to transfer the amount in Step 2 to this new account

6:It’s set so now forget it!

7: When the time comes, withdraw the money from your sinking fund and make the payment

8: Repeat for all similar expenses

So to Sum Up!

I know some of you might be thinking that’s a lot of bank accounts to have open but once it’s done, it’s so much simpler and you have great visibility on your financial position. Other great examples where sinking funds work are car insurance/tax, Christmas, birthday presents (in my family almost all birthdays fall in the months of September – December right in the lead up to Christmas), a savings goal like a new car, a new phone/laptop the list goes on…… you can also use sinking funds for unknown amounts where you have estimated the costs for example car or house maintenance/repairs or getting the house re-painted, you can just start by putting a specific amount away each month and watch the fund grow.

Do you use sinking funds? Or a variation of this idea? Let me know how it works for you. You might also like to read my thoughts on budgeting here and zero sum budgeting method here.


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