Sinking funds: budgeting for bills that don't come every month
Car insurance, the holidays, a new set of tires: costs you know are coming but don't pay every month. A sinking fund saves for each one a little at a time, so when the bill arrives the money is already there. Here is how to set them up, with a worked example.
What a sinking fund is
A sinking fund is money set aside, a little every month, for one known future cost. Instead of finding $900 when the car insurance renews, you put $150 aside each month for six months and the renewal is already paid for.
Most budgets look at one month at a time, which is why a yearly bill feels like an emergency even though you knew it was coming. A sinking fund turns every irregular bill into an ordinary monthly line.
Set them up in four steps
- List the costs that don't come monthly. Go through last year's bank statements and note anything paid once, twice or four times a year, plus the things you know are coming: a holiday, a wedding, a car that's getting old.
- Write down what each costs and when it's due. Use last year's figure, or a fair guess for the ones that vary.
- Divide the cost by the months until it's due. That's the monthly amount. A $180 registration due in 12 months is $15 a month.
- Give each one its own envelope and fill it every month. Keep them separate, so the holiday money can't quietly pay for car repairs.
A worked example
Six sinking funds and what they need each month:
| Sinking fund | Costs | Each month |
|---|---|---|
| Car insurance | $900 every 6 months | $150 |
| Car registration | $180 a year | $15 |
| Holidays and gifts | $1,200 a year | $100 |
| Car repairs | $600 a year | $50 |
| Yearly subscriptions | $240 a year | $20 |
| Dental, glasses, prescriptions | $480 a year | $40 |
| Every month, in total | $375 | |
$375 a month is a real number to find, but it was always being spent. Without sinking funds it arrives as a few large bills that land on the credit card; with them it's spread evenly and planned.
Starting late, or when a bill comes early
If the insurance renews in three months rather than six, divide by what's left: $900 over three months is $300 a month until it's paid, then back to $150 a month for the next one. Starting late costs more for a short while; it doesn't break the method.
When a bill turns out bigger than its fund, cover the difference from another envelope, on purpose, and raise the monthly amount for next time. When it comes in smaller, leave what's left in the fund: it makes next year's bill smaller.
Costs that vary: car repairs, the dentist
Some sinking funds aren't for one bill at all but for a kind of cost that comes at no fixed time. Use the average: what that kind of cost added up to over the last year or two, divided by the months. A quiet year lets the fund grow, and a bad one draws it down.
Sinking fund or emergency fund?
A sinking fund is for something you know is coming, even if not exactly when or how much: the car will need tires. An emergency fund is for what you can't plan for: losing a job, a burst pipe. Keep them apart. A budget that pays the holidays from the emergency fund has no emergency fund left in January.
Common questions
Why is it called a sinking fund?
The name comes from business and government finance, where a sinking fund is money set aside regularly to pay off a debt when it falls due. In a household budget it means the same habit: regular amounts set aside for a known future cost.
Should sinking funds be in a separate bank account?
They don't need to be. What matters is that each fund is tracked separately, which is exactly what envelopes do; the money can sit in your ordinary checking or savings account. Some people prefer a separate savings account so it is harder to spend by accident.
How many sinking funds should I have?
One for each cost big enough to hurt when it arrives. Most households end up with five to ten: insurance, the car, holidays and gifts, medical costs, and subscriptions paid yearly.
What if I can't afford all of them yet?
Start with the bill that is due soonest and the ones that would hurt most, and add the rest as money allows. Even a partly filled fund makes the bill smaller when it comes.
Sinking funds in ShowMeTheMoney
ShowMeTheMoney, the envelope budgeting app, treats a sinking fund as what it is: an envelope with a plan to fill it.
- A budget with a fill period. A budget says how often a cost recurs and, separately, how often to fill it: a $1,200-a-year premium with a fill period of one month funds $100 every month.
- Spending history to size it. Beside each budget you see the envelope's lowest, highest and average month, and the average counts months with no spending at all, so it gives a true monthly cost for something paid once a year.
- Priority when money is short. Put the funds in order, and those at the top are filled first.
- Stuff by Budget fills every envelope to plan in one step, and shows the whole plan before it moves anything.
- The money stays put. An envelope's balance carries over from month to month until you spend or move it.
New to envelopes? Start with how envelope budgeting works.