What It Means
A sinking fund is savings built up on a schedule for one specific expense you already know is coming, such as an insurance renewal, holiday gifts or school costs. You divide the total by the months left until it's due and set that amount aside each month. When the bill arrives, the money is already there, and your regular budgetBudgetA plan for a set period, usually a month, that lists the money you expect to receive and how you'll spend or save it. See more carries on as normal.
Try It: Plan Three Sinking Funds
Change any cost, how far away it is, or your take-home pay. Every number updates as you type.
Your numbers Sample numbers. Change any of them.
Your result
Under 5% of take-home pay. That's easy to automate with a transfer the day after payday.
Between 5% and 15%, which is common for a household with a car, kids and holidays. Fund the nearest deadline first.
Above 15%. Push a deadline back, shrink a goal, or keep only the costs that would truly cause trouble.
How It Sounds at Home
- "That comes out of the car fund."
- "We've been saving for Christmas since January."
- "Don't touch that one, it's for insurance."
The Breakdown
Worked example. A family has three costs coming up:
| Cost | Amount | Months away | Set aside each month |
|---|---|---|---|
| Car insurance renewal | $1,200 | 8 | $150 |
| Holiday gifts | $600 | 1010,000 stepsA popular daily step goal that began as the name of a 1960s Japanese pedometer; later studies find health benefits begin well below it. See more | $60 |
| School supplies and fees | $300 | 6 | $50 |
| Total | $260 |
A single $260 monthly line replaces three months where the budget would otherwise take a hit.
What your number means. Under 5% of take-home payTake-home payThe money that actually reaches you from a paycheck after taxes and other deductions are taken out, also called net pay or net income. See more is easy to automate with a transfer the day after payday. Between 5% and 15% is common for a household with a car, kids and holidays, so fund the nearest deadline first. Above 15%, push a deadline back, shrink a goal, or keep only the costs that would truly cause trouble.
Where It Comes From
The term comes from government finance. In 1717 Britain set up a sinking fund, based on proposals by Robert Walpole, to pay down the national debt. The money came from savings after the interestInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more on part of the debt was cut from 6% to 5%.
Good to Know
A sinking fund and an emergency fundEmergency fundMoney set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly. See more cover different things. An emergency fund is for costs you can't predict, like a job loss or a broken furnace. A sinking fund is for costs you can put on a calendar. Keeping them in separate places stops one from quietly paying for the other.
FAQ
How many sinking funds should I have?
There's no set number. A good start is one for each expense that caused a squeeze last year, then add more as new costs show up.
Where should I keep sinking fund money?
Somewhere separate from everyday checkingChecking accountA bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit. See more so it doesn't get spent by accident. Many people use a savings accountSavings accountA bank or credit union account for money you're setting aside for later, which earns interest and is insured up to federal limits at insured institutions. See more, and some banks let you split one account into labeled buckets.
Is a sinking fund the same as an emergency fund?
No. An emergency fund covers the unexpected. A sinking fund covers planned costs with a known amount and due date.
Do It in Buhata
Jars
Create a Jar for each cost in a Private Space with Premium, give it a target, and type in what you've set aside so its bar shows how close you are, without moving any of the money.
Open BuhataRelated Terms and Categories
- Emergency fund
Money set aside only for unplanned costs, like a car repair, a medical bill or a lost paycheck, kept where you can reach it quickly.
- Sinking fund vs emergency fund
A sinking fund saves for costs you can put on a calendar; an emergency fund covers costs you can't predict, like a job loss or an urgent repair.
- Envelope budgeting
A budgeting method that gives each spending category its own envelope of money, and spending in a category stops when its envelope is empty.
Sources
History of Parliament Online, "Walpole and the National Debt"
Last updated .