Sinking Funds: The Simple Budgeting Trick for Expenses You Know Are Coming
Sinking funds let you save a little each month for predictable but irregular costs like car repairs, holidays and insurance. Learn how to set them up with examples.
Many "financial emergencies" aren't emergencies at all. Car registration, holiday gifts, annual insurance premiums and back-to-school shopping come every year. A sinking fund turns those big, irregular bills into small monthly amounts, so they stop wrecking your budget.
What is a sinking fund?
A sinking fund is money you set aside regularly for a specific, expected expense. You know roughly what it will cost and when; you just save for it ahead of time.
Sinking fund vs emergency fund
| Sinking fund | Emergency fund | |
|---|---|---|
| Purpose | Planned, irregular expenses | Unexpected events (job loss, medical bill) |
| Timing | Known in advance | Unknown |
| You spend it | As planned | Only in a true emergency |
Both matter. Sinking funds protect your emergency fund from being drained by predictable costs.
Common sinking fund categories
- Holidays and birthdays
- Car maintenance, tires and registration
- Annual or semiannual insurance premiums
- Travel and vacations
- Home maintenance (often estimated at around 1% of a home's value per year)
- Medical and dental costs not covered by insurance
- Annual subscriptions and memberships
- Back-to-school and kids' activities
- Pet care and vet visits
- A future car or home down payment
How to set one up
- List expected expenses for the next 12 months. Your bank and card statements from last year are a great source.
- Estimate the cost and due date for each.
- Divide by the months until it's due.
- Automate monthly transfers.
- Spend from the fund when the bill arrives, without guilt.
Example
| Expense | Cost | Months to save | Monthly amount |
|---|---|---|---|
| Holidays | $1,000 | 12 | $84 |
| Car insurance (6-month premium) | $720 | 6 | $120 |
| Car maintenance | $600 | 12 | $50 |
| Summer vacation | $1,800 | 9 | $200 |
| Annual subscriptions | $240 | 12 | $20 |
| Total | $474 |
$474 a month may look like a lot, but these bills were going to happen anyway. Without sinking funds, they often land on a credit card.
Where to keep sinking funds
- A high-yield savings account so the money earns interest. See where to keep cash.
- Many online banks let you create multiple "buckets" or sub-accounts inside one savings account, which is perfect for tracking each fund.
- Alternatively, use one savings account and track the categories in a simple spreadsheet.
Fitting sinking funds into your budget
In the 50/30/20 budget, sinking funds for needs (car repairs, insurance) come from the 50%, and those for wants (travel, holidays) come from the 30%. A fund for a future goal, like a down payment, counts toward the 20%.
Tips
- Start with the two or three biggest irregular expenses.
- Round up; costs usually come in higher than expected.
- Review once a quarter and adjust amounts.
- When a fund has money left over, roll it forward or move it to another goal.
Key takeaways
- Sinking funds spread predictable irregular costs into monthly savings.
- They keep your emergency fund for true emergencies.
- Divide each cost by the months until it's due, and automate it.
- Use separate buckets in a high-yield savings account.
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Free 50/30/20 Budget Spreadsheet
Enter your take-home pay and expenses, and it splits your money into needs, wants and savings automatically.
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