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

The problem sinking funds solve

A monthly budget handles rent, groceries and utilities well because they arrive every month. It struggles with the car registration, the annual insurance premium, holiday gifts and the dentist. Those are not emergencies; you know they are coming. But when they land in a single month, they look like one, and they often end up on a credit card.

How a sinking fund works

A sinking fund is money set aside a little at a time for a specific future expense. Take the expected cost, divide it by the number of months until it is due, and set that amount aside each month. When the bill arrives, the money is already waiting.

For example, an annual bill of $600 due in ten months needs $60 a month. A bill that is due every year becomes $50 a month forever after the first cycle.

Common sinking funds

Start with the irregular costs that have surprised you before:

• Car maintenance, tires and registration.
• Insurance premiums paid annually or twice a year.
• Holidays, birthdays and other gifts.
• Annual subscriptions and memberships.
• Medical and dental costs not covered by insurance.
• Home repairs, or your share of them if you rent.
• Travel.

Sinking fund or emergency fund?

An emergency fund is for things you cannot predict: a job loss, a big medical bill, a burst pipe. A sinking fund is for things you can. Keeping them separate protects your emergency fund from being spent on Christmas, and makes it obvious when an expense really was a surprise.

Where to keep the money

Many people keep sinking funds in a separate savings account, or several, so the money is out of sight of everyday spending. Others keep it in one account and track each fund on paper or in an app. Either works; what matters is that you can see how much each fund holds and what it is for.