Some of the biggest costs in a year are not surprises. They are just infrequent: car registration, an insurance premium paid twice a year, a holiday, a run of birthdays. Because they arrive once in a while, they feel like emergencies when they land.
A sinking fund is a small amount set aside each month for a cost that is coming on a known date. It turns a large, occasional bill into a small, regular one.
The formula
Take what you still need, subtract what you have already saved, and divide by the whole months left until the date. For example, if you need $600 by the end of the year and have $150 saved with four months left, set aside $112.50 a month.
If the date is less than a month away, or you do not have a date, there is no sensible monthly figure. That is a sign to pick a date.
Costs worth a sinking fund
Car registration
- When it lands
- Once a year
- Why it ambushes a month
- One large charge
Insurance
- When it lands
- Every three or six months
- Why it ambushes a month
- Easy to forget between payments
Holidays and gifts
- When it lands
- The same weeks each year
- Why it ambushes a month
- Predictable but rarely planned
Annual subscriptions
- When it lands
- Once a year
- Why it ambushes a month
- A charge you were not watching
Medical and dental
- When it lands
- A few times a year
- Why it ambushes a month
- Small amounts that add up
| Cost | When it lands | Why it ambushes a month |
|---|---|---|
| Car registration | Once a year | One large charge |
| Insurance | Every three or six months | Easy to forget between payments |
| Holidays and gifts | The same weeks each year | Predictable but rarely planned |
| Annual subscriptions | Once a year | A charge you were not watching |
| Medical and dental | A few times a year | Small amounts that add up |
Setting one up
5 things to do
Ticks are for this visit only. Nothing here is saved anywhere.
Where the money lives
The best place is somewhere separate from the account you spend from, such as a savings account, so it is out of sight. If you cannot open a separate account, at least keep it out of your spending number. The first step for many people is a small reserve, covered in how to build your first $1,000 emergency fund.
The annual bill should not be a surprise
An annual bill is a small monthly amount you did not set aside. If a $600 charge arrives in twelve months, that is $50 a month starting today. Divide what remains by the months left, and the number becomes ordinary.