How to build a sinking fund, and how many to keep

A sinking fund is money set aside every month for an expense you know is coming, so that when it arrives it is paid from the balance rather than from the month. Size each fund by dividing the expense by the number of months until it is due, keep one fund per expense that has its own date or purpose, and hold all of them in one savings account with a list that says what each balance is for. Three to six funds cover most households; more than that is a sign that two should be merged.

What a sinking fund is, and what it isn't

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 monthly line, and the fund is where the $120 accumulates until the premium lands. The same shape covers holidays, a vacation, car repairs, a new laptop, and anything else with a known amount and a rough date.

A sinking fund is not an emergency fund. The emergency fund is for the expenses you cannot see coming, and it is not touched for the ones you can. A household that pays car insurance from the emergency fund every March has mislabeled a bill as a surprise, and the emergency fund is that much smaller on the day a real one arrives. See How to build an emergency fund inside a monthly budget for the other fund.

Size each fund

1. Write down 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 vacation, 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.
4. If the fund starts late, add a catch-up. A premium due in two months with nothing set aside needs $360 a month for two months, not $120; after it is paid, the regular $120 share resumes for the next one.

For an expense with a known amount but no fixed date, such as car repairs, size the share from history instead: two years of repairs divided by 24. See How to budget for car repairs and other expenses with no schedule.

A worked example, five funds in one account

The $533 leaves checking on payday as one transfer to one savings account. The account's balance is the sum of five balances, and a list, kept in a note or as a set of budget categories, says what each one holds. After four months the account holds $2,132 and the list reads: car insurance $480, renters insurance $80, holidays $452, vacation $720, car repairs $400. Nobody needs five accounts to know that.

Keep the funds in one account with a list

• One savings account, separate from checking so the balance does not read as spendable, and separate from the emergency fund so the two are never confused.
• One transfer on payday for the total of the shares.
• One list of the funds with their balances, updated when a share is added and when an expense is paid. The list is the whole of the bookkeeping.
• One rule for paying: when the expense lands, move the fund's balance back to checking and pay, or pay from checking and reduce the fund's line by the same amount. Either way the fund's balance is what covers it.

Separate accounts per fund work when there are two or three and the bank makes them easy to open. Past that, the transfers multiply, the balances scatter, and the list was simpler.

How many funds to keep

Three to six. Each fund earns its place by having its own date or its own purpose: the insurance premium has a date, the vacation has a purpose, and neither can be paid from the other without a decision. Two funds with the same purpose and no date, "car stuff" and "car repairs," are one fund. Two funds that are both small and both annual, renters insurance and a registration fee, can share a line called annual bills.

When a fund is paid out and the expense will recur, keep the fund and restart the share. When the expense was a one-off, close the fund and give its share to the next goal.

Common mistakes

• Paying known expenses from the emergency fund. The emergency fund shrinks by a bill that was never an emergency.
• Keeping the shares in checking. A balance that reads as available is spent; the whole point of the fund is that it does not read that way.
• Starting the share the month before the bill. The share starts the month after the last payment, and a late start needs a catch-up.
• Opening an account for every fund. Past three, the transfers cost more attention than the list they replace.
• Forgetting to update the list after paying. The account balance is still right, but the list now overstates every fund, and the next expense is paid from money another fund was holding.
• Ignoring price increases. A premium that rose from $720 to $780 needs a $130 share, and the fund is $60 short on the due date otherwise.

Common questions

Is a sinking fund the same as an emergency fund? No. A sinking fund holds money for an expense you know is coming, sized by its amount and date. The emergency fund holds money for expenses you cannot predict, sized by months of essentials. Keep them in separate accounts, and pay known expenses only from the sinking funds.

What if I can't afford all the shares? Fund the ones with a date and a consequence first, insurance and registration, then the ones that could be skipped, the vacation. A fund that cannot be filled in time is still better than none: it turns a $720 surprise into a $240 one. Write down the shortfall so the due month is not a surprise either.

Should the money be invested? No. A sinking fund is spent on a date, and the money has to be there at face value on that date. A savings account that pays interest is the right place; anything that can be down in the month you need it is not.

How do I handle a fund that is due before it is full? Pay the difference from checking, or the emergency fund if it must be, and write the gap into next month's shares. Then fix the share so it does not happen next cycle: either the start was late or the amount rose.

Can one fund cover several small annual bills? Yes, and it should. Renters insurance, a registration fee, and a domain renewal are one line called annual bills, with a share equal to their total divided by twelve. Separate funds are for expenses large enough to need their own date.

How Zypper handles this

Zypper keeps the list for you as budget categories that carry their 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. The transfer that moves the shares to savings is recognized as a movement between your own accounts. 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.