Sinking Funds: What They Are, How to Set Them Up, and Why They Make Budgeting Easier
I started using sinking funds long before I knew what a “sinking fund” was. I just thought of it as “setting money aside so Future Jill doesn’t get stressed out.”
It wasn’t until I worked for Jamila Souffrant that I heard the actual term. She was explaining sinking funds and I remember thinking, Nope, never heard of that. And then as she kept talking I thought, Ohhh… I’m already doing that. I just didn’t know it had a name.
That’s how a lot of personal finance feels: you intuitively implement pieces of more “formalized systems” without realizing it. For me, sinking funds were one of those systems.
What Is a Sinking Fund?
A sinking fund is money you set aside a little bit at a time for expenses that:
Don’t happen every month (like annual memberships or car insurance), or
Are likely to be big but not predictable (like car repairs or medical bills).
Instead of getting hit with a $600 bill all at once and scrambling to cover it, you’ve quietly set aside $50/month for the past 12 months. When the bill arrives, the money’s waiting.
It’s basically you helping out your Future Self.
How to Set Up Sinking Funds (Step-by-Step)
Here’s the basic process we use to set up sinking funds:
1. List your irregular and “eventual” expenses
Start with anything that:
Happens less than monthly (every other month, quarterly, annually, every few years)
You know will happen sometime, even if you don’t know when (car repairs, vet bills, etc.)
You could include things like:
Utilities that happen quarterly
Annual memberships and/or subscriptions (e.g., Costco, Amazon, Oura)
Car insurance that’s billed every 6 months
Maintenance/repairs for car, house, etc.
2. For irregular bills, divide each total bill by the number of months in its billing cycle
$150 annual bill → $150 ÷ 12 = $12.50/month (I usually round up, e.g., $13)
$90 quarterly bill → $90 ÷ 3 = $30/month
$600 car insurance every 6 months → $600 ÷ 6 = $100/month
2a. For “eventual” expenses, estimate each expense and divide by how often you expect the expense to occur
You can use past expenses and/or ask the internet to give you a rough estimate of what you might pay. Then take this amount and divide by how often you anticipate this expense occurring (in months). It won’t be 100% accurate but it’ll be better than nothing.
$1,900 car repair, once a year → $1,900 ÷ 12 = $158.33/month (Rounded up to $159)
$500 out-of-pocket medical expense, 3 times a year, roughly every 4 months → $500 x 3 = $1,500 ÷ 4 = $375/month
$50 school/kid activity fee, every 2 months → $50 ÷ 2 = $25/month
If you don’t want to get this granular with “eventual” expenses, you can estimate what you might spend overall for eventual expenses and divide by 12 (or whatever cadence works for you). You might not necessarily be able to cover all of the expense but you’ve at least got funds set aside. I think of this as a step down from an emergency fund.
$1,900 car repair, once a year
$500 out-of-pocket medical expenses, 3 times a year = $1,500 total
$50 school/kid activity fee every 2 months = $300 total
$3,700 total expense ÷ 12 = $308.33/month (rounded up to $309)
The monthly numbers you get from your calculations are what you’ll “budget” each month for that sinking fund, right alongside your regular monthly expenses like rent/mortgage and groceries.
3. Set money aside each month and move it out of checking
Each month, move your sinking fund budgeted amounts out of your main checking account into a savings account (or separate sub-accounts/categories, depending on your setup).
Technically, you can keep the money in checking and just track it on paper or in a spreadsheet/app. But for most of us, if the money is just sitting in checking, it’s very easy to spend without meaning to. I like knowing it’s tucked away somewhere safe until we need it.
4. When the bill or eventual expense hits, pull from the sinking fund
When it’s time to pay the bill:
Move the money from your sinking fund back into checking (or pay it directly, depending on how your accounts are set up)
Pay the bill
Move on with your life without having to rearrange your budget that month.
5. Expect the first cycle to be awkward
If you’re just starting and don’t have a large amount of savings, you probably won’t have a full year’s worth of funds to pull from yet.
For example, if your $600 car insurance bill hits next month and you just started the sinking fund, you’re not going to magically have $600.
The first year (or quarter or whatever!) will be a bit of a transition: you might need to pull some from regular savings or adjust other spending while your sinking funds “catch up.”
Sinking funds really shine after you’ve gone through a full cycle.
What We Use Sinking Funds For
We mostly use sinking funds for true irregular bills, things with specific due dates that aren’t monthly:
Utilities: water, garbage, recycling, pest control, phone
Memberships: Costco, Amazon, our community pool, Oura, Google One, Monarch Money
Car-related: auto insurance, car registration, personal property tax, AAA
Insurance: jewelry insurance (bundled with auto insurance)
Some of these end up being really tiny monthly amounts, like $3/mo. Technically we could just absorb those when the bill is due, but I like seeing them as intentional line items on our budget. It’s a reminder of what we’re subscribed to and what we’ll need to pay in the coming year.
We used to keep sinking funds for things like:
Car repairs
Clothing
Gifts
Travel
Now that our overall savings is in a solid place, we don’t keep those as separate sinking funds. If something big pops up in those categories and our regular budget can’t handle it, we’ll pull from savings and then refill as we’re able. But in earlier seasons, having those as formal sinking funds was really helpful.
Sinking Funds vs. An Emergency Fund
A quick distinction that I think is important:
Sinking funds = expenses you can reasonably expect (even if you don’t know when)
Emergency fund = things that are genuinely unexpected (job loss, major home repair, etc.)
If your car insurance is due every 6 months, that’s not an emergency, it’s a calendar event. Sinking funds help keep those expenses from eating into your true emergency savings.
Who Benefits Most from Sinking Funds?
Anyone who gets caught off guard by non-monthly bills. If you’ve ever said, “Ugh, I forgot the car insurance was due,” sinking funds could help.
Anyone whose budget is tight but has some extra room to slowly set aside cash. If cash flow is a real juggling act, smoothing big expenses across the year can make your months feel more predictable.
If you have a ton of extra cash each month and truly don’t feel the pinch of big bills, sinking funds might feel unnecessary. But even then, there’s something really nice about being able to say, “This $500 is for car insurance, this $150 is for memberships,” and know exactly what each dollar is doing. At the other end of the spectrum, if there’s zero wiggle room in your budget, sinking funds could create more stress. Trying to set money aside for future expenses may mean coming up short on immediate needs like groceries, utilities, or rent. Sinking funds are a tool, and like most tools, they work best in certain situations.
Why We Love Sinking Funds
For us, sinking funds do a great job of keeping our finances feeling calm.
The water bill shows up? Paid.
Costco membership renews? Paid.
Car insurance bill lands in my inbox? Also paid.
There’s no scrambling, no pulling money from other categories, and no second-guessing decisions we already planned for. It’s just a quiet system running in the background that makes the rest of our budget feel steadier and easier to manage.
