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Build it · Lesson 9 of 12

Sinking Funds: Plan for Bills That Aren't Monthly

Turn irregular costs like insurance, repairs and gifts into a small monthly amount, using a list, a division and a labelled pot.

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THE WRITTEN LESSONFollow along at your pace

Many budgets break on costs you knew were coming. They just did not come every month. In this lesson you will plan for those bills with a simple tool called a sinking fund, so that a big bill becomes a small monthly amount instead of a surprise.

Known, but not monthly

Think of car insurance, a repair, birthdays, school costs or a yearly subscription. They do not come every month, so they are easy to forget, until several of them arrive all at once.

A year calendar with icons in different months: a car in March, a wrench in June, a school bag in August, a gift in September and a screen in November, and three bills piled in December. Labels list Car insurance, A repair, Birthdays, School costs and Yearly subscription, with the notes All at once and Easy to forget.(opens the full-size picture)
Each cost is known, but they can pile up in one month.

The calendar test

A sinking fund is money you save a little at a time for a known cost. Here is the test: if you could write it on this year’s calendar, it is a sinking fund. If you cannot predict it, like losing your job, that is what an emergency fundemergency fund: Money kept in an account you can reach quickly, to cover unexpected costs or a drop in income without borrowing. How much to hold depends on your circumstances, and official guidance differs by country.Full entry in the glossary is for.

A jar labelled Sinking fund beside a calendar titled This year with the line Car insurance - March and a green Sinking fund tick. On the right, a grey cloud and a crossed-out pay slip labelled Can't predict, with an arrow to a jar labelled Emergency fund.(opens the full-size picture)
On the calendar means sinking fund. Cannot predict means emergency fund.

Make the list

To start, go through the last twelve months of statements, and list every cost that did not come monthly. Next to each, write how much it was, and when it is due.

Twelve small statements, each with a highlighted yearly bill, labelled 12 months of statements. Beside them, a table with the columns Cost, How much and When it's due, listing Car insurance $600 March, Gifts $300 December and Repairs $240 Any time.(opens the full-size picture)
A list with three columns: cost, how much, when it is due.

Divide by the months left

Then divide each cost by the months left until it is due. A $600 insurance bill due in twelve months needs $50 a month. If it is due in six months, you will need $100 a month.

A $600 bill beside six jars each labelled $100, with the formula Cost / months left and the note 6 months: $100 a month.(opens the full-size picture)
The same bill needs more each month when there is less time.

Keep it in labelled pots

Keep the money in a separate account or a labelled pot, so it does not get spent by accident. Labels help. In one trial, simply giving people a labelled box for health costs raised their health savings by 66 percent.

A main account wallet above three jars labelled Car, Gifts and Repairs, with the notes Not spent by accident and Labels help. On the right, a box labelled Health box and two bars, No box and a taller With box, labelled +66% health savings.(opens the full-size picture)
A named pot is harder to spend by accident.

It gets easier

The first year can feel heavy, because you are catching up. In one example, four funds cost $520 a month at first, then just $185 a month once they were on track. Also decide in advance what to do with leftovers, like moving them to the fund that is furthest behind.

Two bars for 4 funds: First round at $520 a month in amber, and a much shorter On track bar at $185 a month in green. On the right, three jars labelled Car, Gifts and Repairs, with the nearly empty Repairs jar marked Furthest behind and the note Decide in advance.(opens the full-size picture)
The monthly amount falls once the funds are on track.

YOUR TURN

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Read the full lesson script

Welcome back. In this lesson, you'll plan for the bills that don't come every month, with a simple tool called a sinking fund.

Many budgets break on costs you knew were coming: car insurance, a repair, birthdays, school costs, a yearly subscription. They don't come every month, so they're easy to forget, until they arrive all at once.

A sinking fund is money you save a little at a time for a known cost. Here's the test: if you could write it on this year's calendar, it's a sinking fund. If you can't predict it, like losing your job, that's what an emergency fund is for.

To start, go through the last twelve months of statements, and list every cost that didn't come monthly. Next to each, write how much it was, and when it's due.

Then divide each cost by the months left until it's due. A six hundred dollar insurance bill due in twelve months needs fifty dollars a month. If it's due in six months, you'll need a hundred.

Keep the money in a separate account or a labelled pot, so it doesn't get spent by accident. Labels help. In one trial, simply giving people a labelled box for health costs raised their health savings by sixty-six percent.

The first year can feel heavy, because you're catching up. In one example, four funds cost five hundred and twenty dollars a month at first, then just one hundred and eighty-five once they were on track. And decide in advance what to do with leftovers, like moving them to the fund that's furthest behind.

So remember: if it fits on this year's calendar, it gets a sinking fund. Divide each cost by the months left. And keep the money in a labelled pot. Before the next lesson, list every bill you pay less often than monthly, and work out its monthly amount. Next, you'll learn what to do when you overspend.