Sinking funds: how to stop irregular expenses from wrecking your budget

Short answer: a sinking fund is money you set aside a little at a time for an expense you know is coming, such as car repairs, an annual insurance premium or the holidays. Divide the expected cost by the months until it is due, save that amount every month, and when the bill arrives the money is already there. It turns "unexpected" expenses, which are really just irregular ones, into a predictable monthly line in your budget.

Why do irregular expenses cause so much trouble?

Most budgets are built around monthly bills. But a lot of spending is not monthly: annual premiums, registration fees, back-to-school costs, gifts, a dental visit, a laptop that is getting old. Because these arrive in lumps, they feel like emergencies, and people reach for a credit card or dip into their emergency fund. A sinking fund removes the surprise by spreading the cost across the months before it hits.

How do you build a sinking fund?

1. List every non-monthly expense. Look back through a year of bank and card statements. You will usually find more than you expect.
2. Estimate the yearly cost of each. Use last year's actual amounts where you can.
3. Divide by 12 (or by the months left until it is due). That is the monthly amount to set aside.
4. Add them up and treat the total as a bill you pay yourself every month, ideally on payday.

In this example, $555 a month covers a whole year of irregular costs, and no single month hurts. If the total looks large, that is useful information: those costs were always there, and the sinking fund only makes them visible.

Where should you keep sinking funds?

• A savings account, ideally a high-yield one. The money needs to be safe and available, and should earn something while it waits. See high-yield savings, CDs and Treasury bills.
• Separate buckets. Many banks let you create several named sub-accounts. Otherwise, use one account and a simple spreadsheet that tracks how much belongs to each purpose.
• Not in the stock market. The money will be needed within months to a few years, so it should not depend on market prices.

How is a sinking fund different from an emergency fund?

A sinking fund is for things you know will happen but not exactly when or how much. An emergency fund is for things you cannot predict, like a job loss or a major unplanned bill. Keep them separate: if you use the emergency fund for predictable costs, it will not be there for a real emergency. How big the emergency fund should be is covered in how many months you need.

Where does it fit in your priorities?

1. A small starter emergency fund.
2. Anything needed to avoid high-interest debt, including your sinking fund for predictable costs, so you stop adding to card balances.
3. Retirement savings, at least enough to capture an employer match.
4. Paying down debt faster, and building a full emergency fund.

If your budget is already tight, start with just one or two sinking funds, such as car repairs and the holidays, and add more as your income allows. For a way to split your spending overall, see why the 50/30/20 rule stops working as your salary grows.

Tips that make it stick

• Automate the transfer on payday so it never depends on willpower.
• Name each fund after the goal. "Car repairs" is harder to raid than "savings".
• Review once a year. Update the estimates, and if you did not spend a fund, roll it forward instead of treating it as free money.
• Spend it without guilt. The whole point is to use the money when the expense arrives.

General education, not financial advice. Amounts in the example are illustrations.

Frequently asked questions