Most budgets break for the same reason: an expense that everyone knew was coming, but that does not arrive every month. Annual insurance, car registration, holiday gifts, school supplies, a yearly subscription. When the bill shows up, it feels like an emergency, and it often ends up on a credit card. A sinking fund fixes that.
What is a sinking fund?
A sinking fund is money you set aside in small monthly amounts for a specific, predictable future expense. Instead of paying $1,200 at once, you save $100 a month for twelve months, and when the bill arrives the money is already there.
Sinking fund vs. emergency fund
An emergency fund is for the unexpected: a job loss or a surprise medical bill. A sinking fund is for the expected: things you know will happen, even if you do not know the exact date or amount. Keeping them separate protects your emergency fund for true emergencies.
Common sinking funds
- Car insurance, registration, maintenance and tires
- Home or renters insurance paid annually
- Holidays, birthdays and gifts
- Annual subscriptions and memberships
- Medical and dental costs not covered by insurance
- Travel and vacations
- Replacing a phone or laptop
- School fees and supplies
How to set one up
- List the expenses. Go through last year's bank and card statements and note every non-monthly cost.
- Estimate each amount and due date. Round up a little to be safe.
- Divide by the months remaining. A $600 expense due in six months needs $100 a month.
- Automate the transfer on payday into a separate savings account, or into labeled “buckets” if your bank supports them.
- Spend from the fund when the bill arrives, then start refilling it for next time.
A quick example
Say your yearly irregular costs are car insurance ($1,200), gifts ($600), car maintenance ($480) and subscriptions ($240). That is $2,520 a year, or $210 a month. Budgeting $210 every month is much easier than finding $1,200 in one bad week. Our savings goal calculator can work out the monthly amount for any target and deadline.
Where sinking funds fit in a budget
In the 50/30/20 approach, sinking funds for necessities like insurance count as needs, while funds for travel or gifts count as wants. Either way, they turn lumpy costs into smooth monthly ones, which makes any budget more realistic. Try it in the 50/30/20 budget calculator.
Frequently asked questions
Should sinking funds earn interest?
A high-yield savings account is a good home, since the money stays safe and available while earning a little. Avoid investing money you will need within a year or two.
How many sinking funds should I have?
Start with the two or three expenses that hurt most when they arrive. You can add more once the habit sticks.
What if I need the money early?
That is fine as long as it is for the purpose you saved it for. Just adjust the monthly amount so the fund is ready next time.
Related guides: how to build a budget you will stick to and how to budget on an irregular income.