What a sinking fund is
Most budgets break on the expenses that don’t come monthly. A $540 car insurance bill every six months is easy to forget until it lands in a month that already has rent, groceries and everything else.
A sinking fund spreads that cost out. Instead of finding $540 at once, you set aside $90 a month for six months. When the bill arrives, you pay it from the fund and your regular budget doesn’t notice.
Sinking funds most budgets need
- Insurance paid every 6 or 12 months: car, renters or homeowners, life.
- Car maintenance and repairs: oil changes, tires, registration.
- Holidays and gifts: birthdays, weddings, end-of-year holidays.
- Annual subscriptions and memberships: software, warehouse clubs, professional dues.
- Medical and dental: copays, glasses, prescriptions.
- Home maintenance: repairs, appliances.
- Travel: a trip you know you’ll take.
- Big planned purchases: a new phone or laptop when the current one wears out.
How much to save each month
The formula is short:
Monthly amount = total needed ÷ months until it’s due
For costs without a fixed date, like repairs or medical bills, look at what you spent last year and divide by 12. Round up; a fund that ends with a little extra is better than one that comes up short.
An example
| Sinking fund | Needed | Months to go | Per month |
|---|---|---|---|
| Car insurance | $540 | 6 | $90 |
| Holiday gifts | $600 | 10 | $60 |
| Car maintenance and repairs | $900 | 12 | $75 |
| Annual memberships | $180 | 9 | $20 |
| Vacation | $1,500 | 12 | $125 |
| Medical and dental | $600 | 12 | $50 |
| Total each month | $420 | ||
$420 a month sounds like a lot until you notice these are costs you’d pay anyway. The difference is that they no longer arrive as surprises.
If a bill is due soon
Starting a fund with only a few months to go means a bigger monthly amount. That’s normal in the first year.
If $180 doesn’t fit, put in what you can and plan to cover the gap from flexible spending the month the bill arrives. Next year starts on time.
Sinking funds vs. an emergency fund
- A sinking fund is for an expense you know is coming, even if you don’t know the exact date or amount. Car repairs belong here: you don’t know when, but you know they’ll happen.
- An emergency fund is for what you can’t plan: losing a job, a medical emergency, a sudden move.
Keeping them apart protects the emergency fund. If routine costs come out of it, it won’t be there when you really need it.
Doing it in Bow
In Bow, each sinking fund is an envelope with a target:
- One-time saves up to a total by a date, counting what’s already in the envelope, so Bow works out the monthly amount for you.
- Set aside adds the same amount every month or year, for costs without a fixed date like repairs.
- Scheduled bills add to their envelope’s target, and yearly ones are spread across the months before they’re due.
Each month, Fund All Needs fills every target at once. The envelope shows what’s needed this month and how much is left to go. More in Bow Docs: Use targets.
Questions
Should sinking funds be in a separate bank account?
They don’t have to be. Many people keep them in one savings account and track each fund’s share in their budget. A separate high-yield savings account can earn interest and makes it less tempting to spend, but it’s not required.
How many sinking funds should I have?
One for each irregular expense big enough to strain a normal month. For most people that’s somewhere between 4 and 10.
What if a sinking fund isn’t enough when the bill comes?
Pay the difference from your flexible spending that month, or from the emergency fund if it’s truly urgent, then raise that fund’s monthly amount so next year is covered.
Is a sinking fund the same as savings?
It’s savings with a specific job and usually a date. General savings or an emergency fund doesn’t have a planned use.