Simple Balance

Budgeting

What are sinking funds?

A sinking fund is money you set aside a little each month for a bill you know is coming, like car insurance in June or gifts in December.

5 min readUpdated

A sinking fund is money you set aside each month for a bill you know is coming but don’t pay every month. Instead of finding $600 for car insurance in June, you put away $100 a month starting in January.

What it is

The name comes from business. When a company borrows money by selling bonds, a sinking fund is how it pays them back a little at a time instead of all at once. FINRA explains bonds if you’re curious. In a household budget, a sinking fund is the same idea: a known amount, needed by a known date, saved in equal pieces.

A bar for each month from January to June, each one a stack of $100 pieces: $100 in January, $200 in February, $300 in March, $400 in April, $500 in May and $600 in June. A dashed line marks the $600 car insurance bill, and the June bar reaches it exactly. An arrow from the June bar pays the bill, drawn as a $600 bar of its own.Car insurance: $600, due in JuneSave $100 a month from January$100Jan$200Feb$300Mar$400Apr$500May$600JunPay$600Bill
Put away $100 a month from January, and the fund reaches $600 in June, the month the bill is due. Then the fund pays the bill.

It’s different from an emergency fund. An emergency fund covers things you can’t predict, like losing a job or getting in a car accident. A sinking fund covers things you can. The holidays come every December.

Common sinking funds include:

  • Car insurance, registration and upkeep
  • Holiday and birthday gifts
  • A vacation
  • Yearly subscriptions and memberships
  • Back-to-school costs
  • Medical bills up to your insurance deductible
  • A new phone or laptop
  • Vet bills

Why it matters

Bills that don’t come every month are easy to forget. A monthly budget can look fine for eleven months, and then the car insurance bill shows up. Without a sinking fund, that bill often goes on a credit card, and you start the next month behind.

Small amounts are easier to handle than big ones. Setting aside $75 a month is one more line in your budget. Finding $900 in December is a scramble.

And when the bill comes, you’re ready. Paying it from money you saved for it means your plan worked.

How to do it

1. List the bills for the next twelve months

Look through last year’s statements for anything you paid once or twice: insurance, renewals, gifts, trips. The list may be longer than you expect.

2. Work out the monthly amount

Divide each bill by the number of months until it’s due. For bills that come once a year, Utah State University Extension and Oregon’s Division of Financial Regulation suggest the same thing: divide by 12 and set that much aside every month.

BillAmountDue inEach month
Car insurance$6006 months$100
Holidays$90010 months$90
Vet checkup$24012 months$20
Three bars on the same scale, each cut into equal monthly pieces. Car insurance, $600 due in 6 months: 6 pieces of $100. Holidays, $900 due in 10 months: 10 pieces of $90. Vet checkup, $240 due in 12 months: 12 pieces of $20.Car insurance: $600$100 a month for 6 monthsHolidays: $900$90 a month for 10 monthsVet checkup: $240$20 a month for 12 months
Each bill is cut into one equal piece for every month until it’s due. The holidays cost the most, but with 10 months to save, each piece is smaller than car insurance’s.

The later you start a fund, the more you have to save each month. That’s a good reason to start all of them now.

3. Set the money aside

You can move it into a separate savings account. Or you can leave it in checking and keep a list of how much belongs to each fund. Either way works, as long as you don’t count that money as free to spend.

4. Pay the bill from the fund

When the bill comes, the money is waiting. Pay it, then start saving again for next time.

How to do it in Simple Balance

A budget in Simple Balance can save toward a date on its own.

Set the goal

On Budgets, under Set a budget, choose the category you’ll pay the bill from, like Car insurance. Type the bill’s amount in Saving up for. A Needed by box then appears: type the due date there, not in Ends after.

The budgets screen: a form for setting one, with fields for the category, the amount and how it's decided, the currency, a start date and an optional end date, an optional savings goal and which budget gets funded first, and a checkbox for carrying what's left into next month. Below it, the list of standing budgets begins with $200 a month for dining out.

The money in this picture is made up. It’s the real product, filled with example spending.

Let it work out the amount

You don’t type a monthly amount. Each month, the budget figures out what’s still needed and divides it by the months left before the due date. The amount changes as the fund fills up, and it stops asking once the fund is full. Carry what is left over into the next month is turned on for you, since a fund has to keep what it saves. Saving goals, automatic amounts and the forecast in the docs shows exactly how each month’s amount is worked out.

Pay the bill from the same category

When the insurance bill comes, record it in the Car insurance category. The money the budget set aside covers it.

Know where the money is

A fund is money in your accounts that’s set aside for one job. The Budgets page shows what’s left to assign after every fund and envelope has taken its share, which tells you how much is really free to spend. If you keep the fund in a separate savings account, leave The budget is about the money in this account turned on for that account, so its money still counts.

A list of transactions, newest first, each with who it was with, which account it was in, its category and its amount, all in dollars. Most are spending on groceries, a lunch, cinema tickets and a transit pass. One is a $750 freelance payment coming in, and one is $600 moved from checking to savings, which shows both accounts and no category.

The money in this picture is made up. It’s the real product, filled with example spending.

One fund for each bill

Each fund belongs to the category it’s saving for. Holiday gifts, insurance and a vacation each get their own budget, and each works out its own monthly amount.

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