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When Emily Nadaff started planning her wedding in early 2024, she was determined to stay on top of her finances.
With roughly 14 months until the big day, the 33-year-old non-profit director started depositing $750 from every paycheque into a dedicated bank account to pay for wedding-related expenses as they came up, aptly labelled with an emoji of a bride and groom. By the time she tied the knot with Josh Lerner in the seaside town of Chester, N.S., in late July, the event had been jointly paid off.
“That allowed me to fully enjoy the wedding,” says Ms. Nadaff, who transferred the remaining funds into a new account that would go towards paying for the couple’s honeymoon later in the year.
Some financial experts recommend setting up bank accounts tied to specific, short-term expenses to shield savings and avoid taking on unnecessary debt. Known as sinking funds, the idea is to “sink” money toward a purchase until it can be paid off in full. Common savings goals include weddings, vacations, and gifts, but also larger, recurring payments like membership fees, insurance premiums, and property taxes.
When one account is used to save for next year’s vacation, a new family car, and holiday gifts, it can be difficult to keep track of progress towards each financial goal. When those lines start to blur, dedicated accounts for specific purposes provide clarity: you’ll know exactly when you’ve hit each savings target and how much you can afford to spend.
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The approach offers a responsible financial strategy at a time when many young Canadians have gotten comfortable spending money they don’t have. Earlier this year, credit bureau Equifax reported 1.4 million Canadians had missed a credit payment in the second quarter – about 118,000 more than a year ago. With more people relying on borrowed money to cover everyday expenses, the Bank of Canada has also warned that persistent reliance on credit could undermine their financial futures.
Using savings accounts for sinking funds are appealing to savers through low fees, competitive interest rates and the flexibility to tailor labels to specific financial goals. But their real power lies in psychology.
Sinking funds are appealing to savers looking for accessibility, flexibility in tailoring accounts to specific financial goals, while also allowing separation from everyday spending.
Morgan Housel, author of The Psychology of Money, says context matters. A dollar is worth the same amount whether it’s in an account titled “Savings” or “Treat Yourself,” but people assign different values to money based on subjective criteria, an idea that ties to the concept of mental accounting developed by U.S. economist Richard Thaler. “People don’t have an emotional connection to a number, but they definitely have one to a story,” he said. “If you have $200 in a weekend fund, you can imagine the trip you’re going to take and the fun you’re going to have.”
Chelsea Langenstam, a 30-year-old Vancouver-based personal finance influencer, said she sees it as “taking care of my present self, versus taking care of my future self.” Ms. Langenstam saves money across several sinking funds and encourages her more than 61,000 followers to do the same. She said that whenever she posts a video offering a breakdown of her accounts, she’s flooded with requests from people wanting to learn more.
A defining feature of sinking funds is that the money is kept out of the market because it’ll be needed before it can generate meaningful returns. When Ms. Nadaff was at the height of wedding planning in April of this year, markets tumbled following trade policy announcements from the United States. “I didn’t want to be taking money out of my TFSA,” she said. “I felt calm knowing it was set aside and that I had access to it.”
Within weeks, those losses were recovered, but that’s not something you can plan for when the photographer’s deposit is due.
But the strategy doesn’t make financial sense in every situation. Alim Dhanji, a financial planner at Assante Financial Management, recommends having three to six months’ worth of expenses set aside for emergencies before setting up a sinking fund, and says those carrying significant, high-interest credit card debt should put money toward reducing those balances first. He also cautions clients against “leaving money on the table” by having too much cash sitting in savings without a clear purpose.
For those ready to start, the mechanics are straightforward. Define your short-term financial goals and establish how much money can be set aside monthly while considering existing obligations to everyday expenses, debt repayment, and long-term financial goals. Experts recommend opening an account with no monthly or withdrawal fees, setting up automatic transfers, and limiting related expenses to the debit card linked to the designated account.
Again, the psychological benefits often outweigh the technical details. “You can spend those dollars to zero,” says Cindy Marques, a Toronto-based financial planner, “because you’re accounting for everything else.”
Like Ms. Nadaff, Ms. Langenstam says paying for her wedding with saved funds made the day feel freer. That’s logical, according to Mr. Housel, who refers to every dollar of debt as “a piece of your future that somebody else controls.” He adds, “If three years from now you’re still paying off your wedding, the other way to define that is that your wedding stole your independence.”
