Sinking Fund

What is a sinking fund?

A sinking fund is money you save in small, regular amounts for a specific expense you know is coming, so the full cost is ready when it is due. Common examples include annual insurance premiums, holiday gifts, car registration, a vacation, or replacing a phone. Instead of one big hit to your budget, the cost gets spread across the months leading up to it.

Key takeaways

• A sinking fund is for expected costs. An emergency fund is for surprises.
• To find the monthly amount, divide the total cost by the number of months until it is due.
• You can keep several sinking funds at once, each with its own name and goal.
• Sinking funds smooth out your cash flow because irregular bills stop landing all at once.

How a sinking fund works

Start by listing expenses that do not show up every month but always show up eventually. Look back through last year's bank and card statements for things like annual subscriptions, back-to-school costs, travel, gifts, and car maintenance.

For each one, decide the amount and the due date. Then divide:

Total cost ÷ Months until due = Monthly savings amount

Hypothetical example: Your car insurance costs $1,200 and renews in 12 months. $1,200 ÷ 12 = $100 a month. You also want $600 for holiday gifts in 6 months, which works out to $100 a month. Setting aside $200 a month means both bills are covered when they arrive, and neither one ends up on a credit card.

Some people open separate savings accounts for each fund. Others use one savings account and track the balances in a spreadsheet or budgeting app. Many banks let you create labeled sub-accounts or "buckets," which makes it easy to see what each dollar is for. The savings goal calculator can help you work out the monthly number for a bigger goal.

Automating the transfer on payday makes sinking funds far easier to keep up. If you use zero-based budgeting, each sinking fund simply becomes its own category.

Why it matters for your Money Type

Priceless Tay describes four Money Types: Spender, Saver, Scrambler, and Strategist. Sinking funds are a strong fit for the Spender.

A Spender is someone whose money tends to slip away on impulse, often before it has a job. Spenders usually are not trying to be careless. They like enjoying life, and a strict "no spending" plan tends to backfire. A sinking fund lets a Spender plan for the fun on purpose. When the concert, trip, or new gadget has its own fund, buying it does not come at the expense of rent or savings, and the question at checkout becomes "is this in the fund?" instead of "can I afford this right now?"

Scramblers, who deal with irregular or tight income, benefit in a different way: sinking funds for annual and quarterly bills cut down on the months where everything seems due at once. A Saver may already save this way and can use named funds as permission to spend money that was set aside for exactly that purpose.

Common questions

What is the difference between a sinking fund and an emergency fund?

A sinking fund is for a known expense with a rough amount and date, like a vacation or insurance renewal. An emergency fund is for unexpected costs or lost income. Keeping them separate prevents planned spending from draining your safety net.

How many sinking funds should I have?

There is no set number. Start with the two or three irregular expenses that cause you the most stress, then add more as you get comfortable. Too many funds can become hard to track, so combine small ones if needed.

Where should I keep sinking fund money?

Most people keep it in a savings account, often a high-yield savings account, since the money will be spent within months or a few years. Keeping it out of your everyday checking account makes it less likely to be spent by accident.

What happens if I do not use all of the money?

If the expense comes in under budget, you can roll the leftover amount into the next cycle of that fund, move it to another fund, or put it toward savings or debt. The choice is yours, as long as it gets a new job.