What is a sinking fund, and how do you set one up?

What a sinking fund is

Some bills come every month, like rent. Others come once or twice a year and are big enough to wreck a month: car insurance, a vet bill, holiday gifts, a wedding. A sinking fund spreads one of those over the months before it, so the bill is already paid for when it arrives.

You may see the term in accounting and bonds, where a company sets money aside to pay off a debt. In a household budget it means the same thing in a smaller room: money for a named cost, put aside early.

It is different from an emergency fund. A sinking fund is for a cost you can name and date. An emergency fund is for the one you can't. Our emergency fund guide covers that one.

How to size a sinking fund

Three steps, and the only math is division.

1. Write down the cost and the month it is due.
2. Count the months from now until then.
3. Divide the cost by the months. That is what you put in each month.

For a cost that repeats, like a bill paid twice a year, add up a full year and divide by 12. Then the fund never runs dry, because the next bill is already filling it. Here is the same arithmetic on four examples. The numbers are made up, so swap in yours.

If the monthly amount is more than you can spare, you have three choices: give it more time, make the cost smaller, or save for it in fewer funds at once. None of those is a failure. It is just what the division tells you.

How to budget for non recurring and recurring expenses

Budgeting for a recurring expense that isn't monthly and budgeting for a one-off cost are the same move with a different number of months.

• Recurring, not monthly: annual total divided by 12. Car insurance, a yearly subscription, property tax, the dog's shots.
• One-off, with a date: cost divided by the months until the date. A wedding, a move, a new couch.
• One-off, no date: a car repair or a dead phone will come, but you can't say when. A general fund for these, topped up each month, does the job.

Fidelity's published plan puts exactly these in one part of take-home pay: planned purchases in the next few years (a vacation or a new car) and unplanned costs (a car repair, a new phone, gifts), along with emergency savings. Ramit Sethi's Conscious Spending Plan has a savings part for goals and the unexpected as well. Both treat this money as a normal part of the plan, not as extra.

Sinking funds couples commonly use

Shared or each person's own

If you keep your own money, you can still pool for what you share. The question to ask for each fund is whose cost it is. If it is both of yours, you can split what goes in the same way you split other shared bills, evenly or by what each of you earns. Our fair split calculator shows what each of you would put in. If it is one person's, it comes from their own money and the other person never has to think about it.

The other thing to settle is what happens when a fund has money left over. Say it before you start: it rolls into the next one, or into a goal, or back to whoever put it in.

Where to keep a sinking fund

You want it safe and easy to reach, and not so easy that it gets spent on dinner. A savings account at an FDIC-insured bank fits. The FDIC lists savings accounts among the deposits it insures, with deposits automatically insured to at least $250,000 at each FDIC-insured bank. That is far more than most sinking funds hold.

You can keep one account for each fund, or one account and a list of what each part is for. One account for each is simpler to see. One account is simpler to open. Pick the one you will actually keep up.

A simple way to start

1. Pick the two bills that hurt most last year.
2. Divide each by 12, or by the months until it is due.
3. Set both to move on payday, so you never decide it twice.
4. Add a fund when the first two feel normal.

Come back and check the totals once a year, since insurance and travel prices change.