What is a sinking fund?
The name comes from finance, where a company sets money aside every year to pay off a bond when it comes due. In a household budget it means the same thing on a smaller scale: you know a cost is coming, so you pay for it in instalments, to yourself, before it arrives.
Sinking funds are for costs that are predictable but irregular. They do not show up every month, so a budget built from last month's spending misses them, and then they arrive all at once: the car insurance renewal, the holiday season, the yearly subscription, the dentist, the new tyres. Without a sinking fund each of those goes on a card or wipes out a month. With one, the money is already there.
How do I calculate how much to put in each month?
One line per fund:
monthly amount = (amount needed - amount already saved) / months until it is due
A $960 car insurance renewal due in 8 months, with nothing saved yet: (960 - 0) / 8 = $120 a month.
For costs that repeat every year with no single due date, such as car maintenance, divide the yearly total by 12. $900 a year of maintenance is 900 / 12 = $75 a month.
Paid every two weeks? Divide yearly amounts by 26 instead, so each paycheck carries its share: 1,200 / 26 = $46.15 per paycheck for a $1,200 yearly cost.
Round up, not down. A fund that ends a few dollars over leaves a small start on next year; a fund that ends short means the bill still hurts.
Which sinking funds should I have?
Go through a full year of bank and card statements and list every cost that appeared only once or a few times. Common ones:
- Car: insurance paid yearly, maintenance and tyres, registration or road tax, inspection
- Home: repairs, appliances, renters or home insurance paid yearly, property tax if not in the mortgage
- People: birthdays, holiday gifts, weddings, back-to-school costs
- Health: dental, glasses, deductibles or prescription costs, vet bills for a pet
- Plans: a vacation, a trip home, a new phone or laptop
- Subscriptions billed yearly: software, memberships, warehouse club, streaming paid annually
Start with the three or four biggest. Five funds you keep up are worth more than fifteen you forget.
What does a set of sinking funds look like with real numbers?
An example household with five funds. The amounts are illustrative.
| Fund | Needed | Saved | Months left | Per month |
|---|---|---|---|---|
| Car insurance renewal | $960 | $0 | 8 | $120 |
| Holiday gifts | $600 | $300 | 2 | $150 |
| Car maintenance (yearly) | $900 | ongoing | 12 | $75 |
| Yearly subscriptions | $240 | ongoing | 12 | $20 |
| Summer trip | $1,800 | $200 | 10 | $160 |
| Total | $525 |
$525 a month looks like a lot. But these costs were always going to happen; the household was already paying about this much a month on average, just in painful lumps. The sinking funds only change when the money leaves.
Notice the holiday gifts line: starting late makes each month bigger. The same $600 started in January would be 600 / 12 = $50 a month. The Christmas budget guide covers this season's version.
How is a sinking fund different from an emergency fund?
| Sinking fund | Emergency fund | |
|---|---|---|
| For | Costs you can predict | Costs you cannot predict |
| Examples | Insurance renewal, gifts, tyres | Job loss, urgent repair, medical bill |
| Amount | The size of the known cost | Months of essential expenses |
| Spent | On schedule, then refilled | Only when something goes wrong |
Using the emergency fund for predictable costs is the most common way it empties. If the tyres need replacing every three years, that is a sinking fund. The emergency fund guide covers how big the other one should be.
Where do I keep sinking fund money?
Three common setups:
- One savings account, with a list. All funds sit in one account and a note or spreadsheet records how much of the balance belongs to each. Simple, and the balance should always equal the total of the list.
- Separate savings pots or sub-accounts. Many banks let you split one savings account into named pots. Each fund has its own balance, so there is nothing to reconcile.
- Inside the budget. The money stays in your everyday account, and the budget carries each fund's balance forward month to month. Fine if you trust yourself not to spend it; riskier if you do not.
Whichever you pick, set up an automatic transfer on payday for the monthly total. If you are paid every two weeks, the two extra paychecks a year are a good time to top up; the paycheck calendar shows which months they land in.
What if I need the money early, or a cost runs over?
Move money between funds on purpose and write it down. If the car repair costs $1,100 and the maintenance fund holds $900, take $200 from the trip fund and note it. The trip fund now needs a little more each month, and you can see why.
If the same fund runs short every year, the estimate is wrong. Raise it. The point is that next year's version of the cost is fully covered.
Can Tally track sinking funds?
Yes, with envelopes. On the Budgets tab, turn on Roll over for a category and it becomes an envelope: leftover budget carries into next month, and overspending carries too, so the balance is a running total built from your real transactions. You can add money or take money from an envelope by hand.
Give an envelope a sinking-fund target, an amount and the month you need it by, and Tally shows how much to put in each month to make it, how much of the target is funded, and when it is fully funded. Tally never moves real money; envelopes are a running tally on top of your budgets.
Your first envelope is free. A second envelope, or any sinking-fund target, is part of Tally Pro.