A sinking fund is a budget category where you set aside a fixed monthly amount toward an irregular or large future expense. When the expense arrives, you already have the money and it doesn’t blow your monthly budget.
The term “sinking fund” comes from corporate bond accounting — a company sets aside money periodically to eventually pay down a debt. In personal finance, you’re doing the same thing for your own irregular expenses.
Why sinking funds matter
Most budgets fail at irregular expenses. Christmas gifts come once a year. Car insurance comes annually or semi-annually. The boiler breaks without warning. A flight home for a family event. A new laptop when the current one dies.
If you budget for monthly income and monthly expenses, these irregular costs always look like emergencies — they exceed what you “have” in any given month. Sinking funds solve this by spreading the cost across 12 months (or however many months until the expense hits).
How to set up a sinking fund
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List your irregular expenses for the next 12 months. Common ones: annual insurance premiums, Christmas gifts, car maintenance, holidays, annual software subscriptions, emergency medical costs, home maintenance.
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Estimate the cost of each expense. Be conservative — car maintenance especially.
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Divide by months until the expense. Christmas gifts = £300. You’re setting this up in April = 8 months away. Set aside £300 ÷ 8 = £37.50/month into the Christmas fund.
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Create a budget category for each fund in your app. In YNAB, this is a standard budget category — the balance just accumulates month over month instead of being spent. In Monarch, you can use a “savings goal” for the same purpose.
Which apps handle sinking funds best
YNAB handles sinking funds natively and well. Budget categories in YNAB carry their balance forward each month — money you don’t spend on “Car maintenance” in March is still there in April, plus the new allocation. The “target” feature lets you set a monthly contribution goal and YNAB tracks progress. See our YNAB review.
Monarch calls these “savings goals” — you set a target amount and a target date, and Monarch calculates the monthly contribution needed. The UI is more visual (progress bar) than YNAB’s but the functionality is similar.
Tiller requires you to build your own sinking fund formula in the spreadsheet — more flexible, more setup.
Goodbudget handles these as envelope carry-overs — unspent envelope money rolls into the next month, which is sinking-fund behaviour in envelope form.
Sinking funds vs emergency fund
A sinking fund is for known or foreseeable irregular expenses. An emergency fund is for unknown emergencies. The distinction matters because they serve different psychological functions:
- Sinking fund: “I know Christmas costs £300 — I’m putting it away now.”
- Emergency fund: “I don’t know what will go wrong — but something always does, and I want a buffer.”
The emergency fund should be 3–6 months of essential expenses in a separate savings account, untouched except for genuine emergencies. Sinking funds are planned spending you’re smoothing over time.
Mixing the two is a common mistake — spending the “emergency fund” on a predictable expense like car service, then having nothing when the boiler breaks.
Related terms
- Zero-Based Budgeting — the methodology sinking funds fit into
- Envelope Method — sinking funds as carry-forward envelopes
- Cash-Flow Forecasting — projecting forward to ensure sinking funds are adequate