Sinking fund

The name comes from the way the fund sinks a future cost into the present a little at a time. A $720 insurance premium due in six months is a $120 line in each of the next six budgets, and the fund is where the $120 collects until the premium lands. A sinking fund turns an expense that arrives once into one that is paid in monthly amounts the budget can absorb, and it is the difference between a bill that was planned and a bill that was a surprise you knew about.

In a sentence

• "We keep a sinking fund for car insurance, so the $720 premium in March never touches March's budget."
• "Her holiday sinking fund gets $100 a month from March, and December is paid for before it starts."
• "A sinking fund is for the expenses you can see coming. The emergency fund is for the ones you can't."

How it works

1. Name the expense, its amount, and the month it is due. For a recurring one, such as insurance, the date repeats; for a one-off, such as a laptop, it is a single month.
2. Count the months from now until then.
3. Divide the amount by the months. That is the monthly share, and it goes into the budget as a fixed line, like a bill.
4. Move the share to savings on payday, and pay the bill from the fund when it lands. For a recurring expense the share simply continues toward the next occurrence.

Monthly share = expense ÷ months until it is due

A fund that starts late catches up: a premium due in two months with nothing set aside needs $360 a month for two months rather than $120, and the regular share resumes once it is paid. An expense with a known size but no date, such as car repairs, is sized from history instead, two years of repairs divided by 24.

An example

The three shares are one $320 transfer to a single savings account each month, with a note of what each balance covers. After six months the account holds $1,920; the $720 premium is paid from it, leaving $1,200 split evenly between the two funds still building, and the $120 share carries on toward the next premium. Nothing about the month the premium landed in was different from the five before it.

Why it matters

Irregular expenses are the usual reason a budget that works in most months fails in one. Turning each one into a fixed monthly share makes the month's committed spending visible before it starts, keeps the credit card and the emergency fund from becoming the fallback, and shows the real cost of a household's commitments: the example above has $320 a month of expenses that no single monthly statement ever shows.

Sinking fund versus emergency fund

A sinking fund is for a known expense with a known size and a rough date. An emergency fund is for the unknown: the job loss, the transmission, the trip home. Paying the annual premium from the emergency fund mislabels a bill as a surprise, and the fund is that much smaller on the day a real one arrives. Keep both, in the same savings account if you like, and keep the list that says which dollars are which. See Emergency fund.

Common questions

Where should I keep a sinking fund? In one savings account for all of them, with a list of what each balance covers, rather than a separate account for each. The list does the separating; the account does the earning.

How many sinking funds should I have? One for each expense with its own date or purpose, which for most households is three to six. More than that is a sign that two should be merged, such as every insurance premium into one fund.

Is a sinking fund the same as a savings goal? The mechanics are the same, a monthly share toward a target by a date. A sinking fund is usually for money you will certainly spend, a premium or a replacement, and a savings goal for something you want, a trip or a down payment. Both are sized the same way.

What if the bill is bigger than the fund when it lands? Pay the difference from that month, then set the next share from the actual amount. A fund sized on last year's premium is exactly last year's premium short when this year's goes up.

Is a budget category that rolls over a sinking fund? Yes, that is how a budget builds one: the category's monthly amount is the share, the carried balance is the fund, and the bill is paid from the balance when it lands.

Go deeper

• How to build a sinking fund, and how many to keep covers sizing, catching up and the list that keeps several funds in one account.
• How to budget for bills that aren't monthly applies the same share to every non-monthly bill at once.
• How to budget for car repairs and other expenses with no schedule sizes a fund from history when there is no due date.
• The Savings goal calculator shows how long a monthly share takes to reach a target.

Where it shows up in Zypper

Zypper builds a sinking fund as a budget category that carries its balance. Give a category the expense's cadence, Every three months, Every six months, or Every year, with the full amount for each occurrence, and the row shows the monthly equivalent; a cadence longer than a month turns on Roll over unspent budget, so each month's share accumulates in the category and the carried balance shows beside the amount. A Starting balance seeds a fund you had already begun, and once the bill has been detected from your transactions, Zypper holds back a reserve from the carried balance for the next due date and reads $X short when the balance will not cover it. See Rolling over unspent budget and Recurring bills in your budget for the details, or get started with Zypper to set up your funds as categories.