The short answer: a sinking fund is money you put aside a little at a time for a cost you know is coming but that doesn't happen every month, such as annual car insurance, an MOT, birthdays or Christmas. Divide the expected cost by the number of months until it's due, and that's your monthly amount.
Why they help
Irregular costs are often what knock a monthly budget off course. They're not really surprises, but they feel like it when a large bill lands in one month. Spreading them out turns one big hit into small, predictable amounts.
How to work out a sinking fund
- List the irregular costs you expect in the next 12 months.
- Estimate each one. Last year's bill is a good starting point.
- Count the months until each is due.
- Divide cost by months to get a monthly amount.
A worked example
| Cost | Estimate | Months away | Per month |
|---|---|---|---|
| Car insurance | £480 | 12 | £40 |
| MOT and service | £240 | 8 | £30 |
| Christmas | £360 | 9 | £40 |
| Birthdays | £180 | 12 | £15 |
Made-up figures for illustration.
In this example, £125 a month would cover all four when they arrive.
Where to keep the money
People organise sinking funds in different ways, from separate pots to simply tracking them on a spreadsheet. Which suits you is a personal choice. MoneyHelper has impartial information if you'd like to read more about the options.
Tracking sinking funds in a spreadsheet
Give each fund a row with its target, due date, amount saved so far and amount still needed. A formula for months left and =StillNeeded / MonthsLeft keeps the monthly figure up to date as things change.
Frequently asked questions
What's the difference between a sinking fund and an emergency fund?
A sinking fund is for costs you know are coming. An emergency fund is a general buffer for things you can't predict.
How many sinking funds should I have?
As many as you find useful. Some people have one combined "annual costs" pot; others prefer one per cost.
Track them in a template
Our Savings Goals Tracker handles up to 10 goals, with target dates, progress bars and the monthly amount needed for each. The Monthly Budget Planner also shows the true monthly cost of yearly bills.
Important: This article is general information to help you organise your money. It is not financial advice and doesn't take your personal circumstances into account. Any figures are made-up examples. For free, impartial guidance, visit MoneyHelper. If you're worried about debt, contact StepChange or Citizens Advice.