How to use sinking funds for family expenses you know are coming

Some expenses aren't emergencies. You know they're coming, you just don't pay them every month. Think holiday gifts, back-to-school shopping, summer camp, new tires, the furnace service and annual insurance bills.

When those land on a normal paycheck, something else gets squeezed or goes on a credit card. A sinking fund fixes that. You set aside a small amount every payday for one specific future cost, so the money is there when the bill comes.

What a sinking fund is

A sinking fund is money you save a little at a time for a known expense. Each fund has a name, a target amount and a due date.

It's different from an emergency fund. An emergency fund covers things you can't predict, like a job loss or a medical bill. A sinking fund covers things you can predict but don't pay often. Keep them separate. If the holiday fund and the emergency fund share one pot, December will empty both.

How to size a sinking fund by paycheck

A monthly budget divides the yearly cost by 12. If you're paid every other Friday, divide by the number of paychecks left before the due date instead. That matches the days your money arrives.

The formula:

Target amount ÷ paychecks before it's due = amount per paycheck

Some examples:

• Holiday gifts: a $600 target with 20 biweekly paychecks until mid-December is $30 per paycheck.
• Car registration: a $240 target due in 12 paychecks is $20 per paycheck.
• Back-to-school: a $400 target with 8 paychecks until August is $50 per paycheck.

If you start late, the per-paycheck amount is higher. That's a reason to start the next one right after the last one is spent.

To find your targets, go through last year's bank and card statements and look for the big one-off charges. Those are your sinking funds. Round each target up a little.

Sinking funds to start with

Start with three to five. You can add more once the first ones are running.

Holidays and gifts

Birthdays, holidays, teacher gifts and the parties your kids get invited to. Add up last year's total and spread it across the year.

Summer and school breaks

Summer camp, childcare during breaks, a family trip and higher grocery bills when the kids are home all day. If summer camp signups open in winter, the fund needs to be ready by then, not by June.

Back-to-school

Supplies, clothes, shoes, fees and the fall sports signups.

Car maintenance and repairs

Oil changes, tires, brakes, registration and inspection. Older cars need a bigger fund.

Home repairs and maintenance

This covers appliance repairs, roof leaks and the yearly furnace service. Homeowners need this one. Renters can keep a smaller one for things the landlord won't cover.

Medical and dental

Deductibles, copays, braces and glasses. If you have an FSA or HSA, some of this may come from there.

Annual bills

Insurance premiums you pay once or twice a year, memberships, software and subscriptions that bill yearly.

How to build your first sinking fund

1. Pick one fund. The one that hurt most last year is a good place to start.
2. Set a target and a due date.
3. Divide by the paychecks left before it's due.
4. Add that amount as a line in your budget for every paycheck.
5. Move the money on payday, before you spend anything else.
6. When the expense comes, pay it from the fund.

If you're new to budgeting this way, start with budgeting by paycheck instead of by month. Sinking funds are just one more line on each paycheck.

Where to keep sinking fund money

You don't need a separate bank account for each fund. One savings account works if you track each fund's balance somewhere. That can be a spreadsheet or categories in a budgeting app.

Some people prefer separate accounts because they can see each balance in their bank app. Some banks let you create named savings buckets inside one account. Either works. What matters is that you write each fund's balance down somewhere you'll check.

Sinking funds in a budgeting app

In a budget app, each sinking fund is a category. You put the per-paycheck amount in on payday and leave it alone until the expense comes.

The one setting that matters is whether unspent money carries into the next period. If a category resets every payday, your sinking fund disappears. You need the balance to grow.

In Budgey, sinking funds work as digital envelopes funded on payday. The Carry balances over setting lets you carry unspent balances to next period, so each fund keeps growing until you spend it. Carry balances over works on Core and Plus. Core is $5/mo or $20/yr. Plus is $10/mo or $100/yr for 2 or more banks or budgets.

If you're comparing envelope apps for this, here are some Goodbudget alternatives.

Mistakes to avoid

• Mixing sinking funds with the emergency fund. Keep them apart.
• Starting too many at once. Start with three and add more once those run on their own.
• Skipping the payday transfer. Small amounts only work if you move them every time.
• Spending a fund on something else. If you have to borrow from one, write down how you'll pay it back.
• Getting the target wrong and giving up. If the car repair cost more than the fund, pay the gap and raise next year's target.

When you're done

When an expense comes in under target, the extra can stay in the fund for next year, or go to savings. When a fund is spent, start the next round on the next payday.

Sinking funds work alongside any budgeting method. If you're deciding which method to use, here's how the main budgeting methods compare.

FAQ

What's the difference between a sinking fund and an emergency fund?
A sinking fund is for a known cost you can plan for. An emergency fund is for costs you can't predict. Keep them separate.

How much should I put in sinking funds each paycheck?
Add up each fund's target divided by the paychecks before it's due. That total is your sinking fund line for each paycheck.

Do I need a separate bank account for each sinking fund?
No. One savings account works if you track each fund's balance in a budget or spreadsheet.