Sinking Funds: No More Surprise Bills

The story: Lee’s six-month bill

Lee opens a car insurance bill at the kitchen table, then sets up small labeled savings jars for each big bill coming up.

1. Narrator: Lee’s car insurance renews every six months. Every time, the bill feels like a surprise.
2. Lee: I knew it was coming. I just never had the money ready.
3. Narrator: A sinking fund fixes that. Take the bill and divide it by the months until it’s due.
4. Lee: $1,200 over 6 months is $200 a month. That I can plan for.
5. Narrator: Lee does the same for holidays and car repairs, each in its own labeled bucket in one savings account.
6. Lee: Six months later, the bill came, and the money was already there.
7. Narrator: Big bill ÷ months = small bill.

What you’ll learn

1. The sinking fund formula

   A sinking fund is money you set aside for a known cost that’s coming later. Divide the cost by the months until it’s due. Save that amount each month, and the full amount is ready on time.

   Example: a $900 holiday budget, 9 months away. $900 ÷ 9 = $100 a month.

2. Common sinking funds

   Households often keep sinking funds for car insurance, holidays and birthdays, school costs, car and home repairs, vet bills and yearly memberships. Any bill you can see coming can get one.

3. One account or several

   Some people use one savings account with labeled buckets. Others open a separate account for each fund. Both work. What matters is knowing how much of the money belongs to each bill.

4. Not the same as an emergency fund

   A sinking fund is for planned costs you know are coming. An emergency fund is for unplanned ones, like a job loss. Keeping them apart means a planned bill never empties your emergency savings.

Key words

sinking fund

money set aside each month for a known cost coming later

savings bucket

a labeled share of a savings account set aside for one goal

Common questions

What if a bill is due sooner than I can save for it?

Save what you can now, and start the fund for the next time that bill comes around. The second time is much easier.

Can I add yearly bills to my monthly plan instead?

Yes. Listing a yearly bill with its monthly share in your plan works the same way as a sinking fund.

Remember this

Big bill ÷ months = small bill.

Try it: Set up three sinking funds

1. Pick 3 known costs coming in the next year.
2. Divide each cost by the months until it’s due.
3. Set up a monthly transfer or a labeled bucket for each one.

No account needed: a sheet of paper and your bank’s savings account.