Sinking Fund
Money saved gradually for a known future expense, so it is paid without disrupting your budget.
Definition
A sinking fund spreads a predictable irregular cost across the months before it is due. An emergency fund covers costs you cannot predict. Using both stops planned expenses from raiding your emergency savings and stops emergencies from becoming debt.
Examples
• Car insurance of 600 due in October: save 50 a month from November. • Holiday gifts of 300: save 25 a month all year. • Tyres expected in 18 months: save a monthly share now.
Sinking fund vs emergency fund
Sinking fund: known cost, known timing, planned. Emergency fund: unknown cost, unknown timing, unplanned. Both should be separate.
How to calculate
Divide the expected cost by the months until it is due. Adjust if the price changes.
Common sinking funds
Annual bills, car maintenance, home repairs, school costs, gifts, travel and medical deductibles.
Also Known As
Planned expense fund · Goal pot
Key Takeaways
- Sinking funds cover predictable costs.
- Emergency funds cover unpredictable ones.
- Divide cost by months until due.
Frequently Asked Questions
Start with your two or three largest predictable costs.
Yes, if you track each balance; separate pots make it easier.
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