Finance · 3 min read
What Is a Sinking Fund (and How Much to Save)?
A sinking fund is money you set aside a little at a time for an expense you know is coming: car insurance, holiday gifts, a new laptop, annual subscriptions. Instead of a big bill landing all at once, you divide it by the months until it's due and save that amount each month. When the bill arrives, the money's already there.
Why it helps
A lot of "unexpected" expenses aren't unexpected at all. The car needs tyres every few years. Christmas is on the same date every year. Your annual insurance renewal arrives like clockwork. Without a plan, these irregular bills either raid your emergency fund or go on a credit card. A sinking fund turns them into small, boring monthly transfers.
How it's different from an emergency fund
- Emergency fund: for things you can't predict, like job loss or an urgent repair. See how much emergency fund do I need?
- Sinking fund: for things you can predict, even if they're irregular.
Keeping them separate means your emergency money is still there when a real emergency happens.
Setting one up
- List your irregular expenses from the past year. Bank statements are the best source.
- Estimate the next cost and when it's due.
- Divide by the months until then.
- Automate the transfer into a separate savings pot on payday.
An example
| Expense | Yearly cost | Save per month |
|---|---|---|
| Car insurance (annual) | $1,200 | $100 |
| Holiday gifts and food | $900 | $75 |
| Car maintenance and tyres | $600 | $50 |
| Birthdays | $480 | $40 |
| Total | $3,180 | $265 |
That $265 a month might look like a lot. But those bills were always coming; you were just paying for them in lumps, often with interest. For a one-off target with a specific date, like a new sofa in 8 months, the savings goal calculator works out the exact monthly amount.
One account or several?
Either works. Many banks let you create named "pots" or sub-accounts within one savings account, which is the neatest option: you can see at a glance how much is set aside for each thing. If you only have one savings account, a simple spreadsheet tracking each fund's balance does the job.
Where to keep it
Somewhere safe and easy to access, ideally paying some interest. Sinking funds aren't for investing; you need the money on a specific date, so you don't want it to fall in value.
Tips that make it stick
- Start with your two biggest irregular bills, then add more later.
- Round up. Prices rise. $100 a month for a $1,150 insurance bill gives you a buffer.
- If you're starting late, divide what's left by the months remaining. It's fine if the first year is a bit uneven.
- Review once a year when you set your budget. The budget calculator helps you see how sinking funds fit alongside everything else.
Holiday season is a classic sinking fund. If you want a full plan for it, see how to set a holiday budget.
Frequently asked questions
What is a sinking fund?
Money saved gradually for a specific, predictable future expense, such as annual insurance, car maintenance or holiday gifts.
How much should I put in a sinking fund?
Divide the expected cost by the number of months until it's due. A $1,200 annual bill due in 12 months needs $100 a month.
What is the difference between a sinking fund and an emergency fund?
A sinking fund is for predictable expenses; an emergency fund is for unexpected ones like job loss or urgent repairs.
Where should I keep sinking funds?
In an easy-access savings account or separate named pots, not in investments, since you need the money on a set date.