This article is by editor Linda Vergon.

About four years ago, Breezy and her husband opened a checking account at their local credit union so they could save for car-related payments – insurance, gas, repairs, and the like. They liked how it allowed them to separate these expenses from the rest of their spending. Soon, they established more funds.

Right now, she and her husband have four sinking funds and she is considering adding another. The way they currently have their accounts divided is:

  1. Celebrations (holidays, birthdays, weddings, etc) – checking account with credit union
  2. Car repairs (and eventual car replacement) – checking account with credit union
  3. Medical expenses – HSA account
  4. Home improvement – savings account at a bank.

But managing the different funds is becoming a bit of a nightmare. Sometimes she finds that too much has built up in the car repairs account and there’s not enough in the home improvements account, so she often borrows from one account to take care of an expense in the other. In addition, she has a new goal.

“However, now I feel the need for more sinking funds to save up for some larger expenses, such as a vacation or a new car, but I’d rather avoid having five different accounts. I was wondering how other readers might manage this situation. I would like to add a vacation account for a trip that we are planning to take in about two years. But, I’m not sure [about] what is the best way to save up for that expense.

“How can I determine a healthy balance for each area? Is it best to keep the balance in a savings account, checking account, cash, or other?”

When Andrea wrote asking how much to keep in an emergency fund, J.D. Roth’s advice was to “do what works for you. There is no one right answer. Examine your situation – your income and your needs – to decide how much you should save.” And in the comments, Dylan also had a good suggestion for how to determine a healthy balance:

“Here is an easy (maybe even fun) way to ‘crash test’ your finances. Make a copy of your Quicken, Money, Excel worksheet, or grab a blank check book register and simulate emergencies. Try injuries, illness, job loss, car gets stolen, day care evaporates, part of your house requires repairs, legal fees to mount a defense, whatever you can think of. You may need to do a little research, but this can help give you a sense of what your cash flow needs might actually be so you can plan accordingly.”

As for the best type of account to use, Breezy says they do not use an online bank currently, but they are open to the idea if that’s an easier way to manage multiple funds. Once she establishes the “healthy balance” for each fund, she could build funds in an online account and then transfer amounts over to a certificate of deposit (CD) periodically, staggering the terms so they mature at the right time. This suggestion is a little more complex; but for her trouble, she’ll probably earn a little better interest over the next two years.

How do you determine how much to save, and how do you manage multiple sinking funds? What type of account should she use to save up for her vacation?