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Sinking funds: how to save for expenses you know are coming
Most budget emergencies are not emergencies. They are yearly bills we forgot to plan for. Sinking funds fix that.
The car registration arrives, the holidays come, the insurance renews. None of it is a surprise, yet each one feels like one.
A sinking fund is money you set aside every month for a specific expense you already know about.
How it works
Divide the yearly cost by the number of months until you have to pay it. That is your monthly amount.
Example: holiday spending of $900 in December, starting in March. That is 9 months, so $100 a month. When December comes, the money is already there and nothing goes on a card.
What usually deserves a fund
- Car registration, maintenance and new tires
- Insurance premiums paid once or twice a year
- Holidays and birthdays
- Back-to-school costs
- Annual subscriptions and memberships
- Medical deductibles you expect to reach
Look at last year's bank and card statements. Anything that showed up once or twice and hurt the budget is a candidate.
Setting it up in 20 minutes
- List the expenses, the amount and the due month.
- Calculate the monthly amount for each.
- Add them up: this is one line in your budget.
- Open a separate savings account or labeled buckets inside one.
- Schedule an automatic transfer on payday.
Keep the money in an account covered by FDIC deposit insurance. MyMoney.gov has free planning tools from the federal government.
Why it changes the whole budget
Without sinking funds, predictable bills land on credit cards and turn into interest. With them, the only true emergencies left are the real ones, and your emergency fund stays intact for those.
Frequently asked questions
Is a sinking fund the same as an emergency fund?
No. An emergency fund covers the unexpected, like a job loss. A sinking fund covers expenses you know are coming, like car registration or the holidays.
How many sinking funds should I have?
Start with the three or four biggest yearly expenses. Too many small funds become hard to manage.
Where should I keep the money?
In an insured savings account, separate from checking. Many banks let you create several labeled savings buckets.
What if I need the money early?
Use it for its purpose, then recalculate the monthly amount for the months left.
Where to keep sinking funds so the money earns something while it waits.