Sinking funds: saving for the bills you forget

Resources · Money basics · 5 min read Building

Key points

• A sinking fund is money you put aside each month for a cost you know is coming.
• It turns big yearly bills into small, predictable amounts.
• It’s not an emergency fund. That one covers the unexpected.
• Divide the yearly cost by the months you have left before it’s due.

The bills that wreck a budget

Plenty of budgets work fine month to month, then fall apart a few times a year. And the cause usually isn’t an emergency. It’s the stuff you knew was coming and forgot to plan for.

Think car registration, insurance and servicing. Annual subscriptions and memberships (a subscriptions audit will dig those up). Birthday and holiday gifts, school costs, the dentist, the optometrist. Home or contents insurance if you pay it yearly. Travel.

None of it is a surprise. But when three of those land in the same month, they tend to end up on a credit card. A sinking fund stops that from happening.

How a sinking fund works

Work out roughly what a cost will be and when it’s due. Split it into monthly amounts. Put that aside every month. When the bill turns up, the money is already sitting there waiting for it.

Here’s the whole formula:

Monthly amount = expected cost ÷ months until it’s due

That’s it.

A worked example

Say you list your irregular costs for the coming year:

Put aside $275 a month and $3,300 of “surprises” stop being surprises. The same maths works in any currency.

Starting partway through the year

If a bill is due sooner, you’ve got fewer months to save. Say that $1,080 car bill is six months away and you’re starting from zero. That’s $1,080 ÷ 6 = $180 a month until it’s paid, then back down to $90 a month after.

Too much right now? You could cover part of this year’s bill from savings and set the fund up properly for next year.

Sinking fund or emergency fund?

They look alike. They aren’t.

A sinking fund is for costs you know are coming, even if the exact amount or date moves around a bit. An emergency fund is for the things you can’t see coming, like losing your job, an urgent repair or a medical bill.

Keep them apart. Otherwise paying the car registration quietly drains your safety net and you don’t notice until you need it. Some people hold both in one account and track them on paper. Others want separate accounts. Go with whatever keeps you clear about which money is for what.

Ways to set up your sinking fund

One account, tracked on paper. All your sinking fund money goes into one savings account, and a simple list or spreadsheet shows how much belongs to each goal. Low effort, but you do have to keep the list up to date.

Separate accounts or sub-accounts. Some banks let you create several named savings pots, each with its own balance. Very clear at a glance. The catch is more accounts to keep an eye on.

Cash envelopes. For smaller amounts like gifts, some people still use actual envelopes. You can see and touch the money, which helps. It’s not where you’d keep larger sums, though.

Whichever way you go, set up a recurring transfer on payday. Then it happens without you having to remember.

Finding the costs you’ve forgotten

Start with the last 12 months of bank and card statements. Anything that isn’t monthly goes on the list. Then go through your calendar for birthdays, holidays and renewals.

Next, think about what’s wearing out. Tyres. The washing machine. Your glasses. That phone with the cracked screen.

Finally, add a small “miscellaneous” fund for the things nobody ever remembers. There’s always something.

Your estimates don’t need to be exact. Round up a little and you’ve built in some breathing room.

If money is tight

Can’t stretch to the full monthly total yet? Fund the biggest or least flexible costs first, the ones that can’t move. Or start with a smaller amount and build it up as you go. You can also chip away at the cost itself where there’s room, say with a cheaper plan for gifts this year.

If you can’t keep up with your regular repayments as well, free debt help is available and confidential.

Common questions

What is a sinking fund?

Money you put aside each month for a cost you know is coming, like car registration, gifts or an annual bill. It turns big yearly costs into small, predictable amounts.

What is the difference between a sinking fund and an emergency fund?

A sinking fund is for costs you know are on the way. An emergency fund is for the things you can’t predict, such as losing your job or an urgent repair.

How do you work out a sinking fund amount?

Divide the expected cost by the number of months until it’s due. A $1,080 bill due in six months, for example, works out to $180 a month.

Try it

Our savings goal calculator works out how much to put aside each month for a specific cost and date.

General information only, not financial advice. Your situation is your own.