How to Set Up Sinking Funds for Irregular Expenses

Some bills come once a year, or once every few years, and they often arrive at the worst moment. Annual insurance, a licence renewal, school fees, a laptop that stops working or a tax payment can turn a normal month into a crisis. A sinking fund solves that problem. You save a small amount each month for a cost you can see coming, so the money is ready when the bill arrives.

The method is simple. List each irregular cost, divide it by the number of months until you pay it, and move that amount into a separate place every month. It works for households and for freelancers, especially when income changes from month to month. The sample numbers below are round and made up, so you can swap in your own.

What a sinking fund is

A sinking fund is money you save gradually for a planned expense that does not come every month. YNAB, a budgeting app, describes sinking funds as money "you gradually set aside to cover specific non-monthly expenses." The fund does not change what you spend. It spreads a large or irregular cost across the months before you pay it.

Find your irregular costs

Start with your bank and card statements for the last 12 months. Look for bills that came once, or only a few times. Common examples include:

• Vehicle or home insurance paid yearly or every six months
• Licence, registration and membership renewals
• School fees, uniforms or exam costs
• Equipment, such as a phone, laptop or tools
• Repairs and servicing
• Gifts and celebrations you can predict
• Tax payments you know are due

Then add any cost you expect but have not paid yet. A list that is slightly too long is better than one that misses a bill.

Turn each cost into a monthly amount

Divide each total cost by the number of months until you must pay it. YNAB's method is to divide the cost by the number of months until you will have to pay it. Chime, a banking app, gives the same approach: note the date you need each sum, then divide the cost by the months you have until then. If you cannot estimate the cost, make a sensible guess, then correct it at the next review.

Choose where the money sits

You can use one savings account with labelled sub-goals, or separate accounts if your bank allows them. Either works. What matters is that you can see how much belongs to each bill. Keep a simple list or spreadsheet with the goal, the target amount, the due date and the balance.

Keep the money in a savings account that is easy to reach, not in an investment. Money you need within a year or two should not depend on how markets move.

Start small and build

You do not need to fund every goal at once. Start with the one bill that causes you the most stress, then add the next when the first is running smoothly. A single working sinking fund teaches the habit, and the habit is what makes the method last. If your budget is tight, begin with a small transfer for the largest bill and increase it at each review.

Automate the transfers

Treat the transfer like a bill. Citi advises setting up automatic transfers so savings happen consistently, and treating savings like a recurring bill. Set the transfer for the day after you are paid. Chime and SuperMoney both recommend monthly automatic transfers for the same reason.

Worked example with round numbers

Suppose you have three irregular costs over the next year:

• Vehicle insurance: $600 a year, paid in March. Monthly amount: $600 ÷ 12 = $50.
• Laptop replacement: $900, planned in 18 months. Monthly amount: $900 ÷ 18 = $50.
• Software and domain renewals: $240 a year, paid in June. Monthly amount: $240 ÷ 12 = $20.

Your total monthly transfer is $50 + $50 + $20 = $120.

After 12 months of transfers, you will have saved $1,440 ($120 × 12). That is enough to pay the insurance ($600) and the software renewal ($240). The laptop fund holds $600 of its $900 target at that point, so you keep transferring $50 a month until the laptop is due at month 18, when it reaches $900.

If your insurance premium rises to $720 next year, your monthly amount for that bill becomes $60 ($720 ÷ 12). Update the figure at the next review, instead of waiting for the bill to arrive.

Freelancers and irregular income

If your income moves from month to month, set the sinking fund as a fixed monthly transfer based on your annual costs, not on what you earned that month. In good months, move extra money into the funds. In slow months, the transfer may need to shrink, but avoid skipping it entirely where you can. The budget on irregular income guide explains a baseline method you can use alongside sinking funds.

An example with uneven income

A freelancer has a fixed sinking fund transfer of $120 a month, based on the annual costs in the example above. In one month she earns $1,800, and in the next she earns $500.

• In the good month, she moves the $120 plus an extra $300 into her funds, so the bills are covered well ahead of time.
• In the slow month, she still moves the $120. That is 24% of her $500, a larger share than she would like, but it keeps the plan on track.
• If the slow month would leave her short of rent, she pauses only the extra amounts, not the fixed $120, and writes down the date she will catch up.

The rule is simple: the fixed transfer comes first, the extra comes from good months, and any pause is written down with a plan to restart.

When a bill comes early

Bills do not always keep to the date you expected. Suppose the vehicle insurance from the worked example is due in 10 months, not 12. The total is still $600, but the monthly amount rises to $600 ÷ 10 = $60. If you keep transferring $50, you will be $10 a month short by the due date, which is $100 in total.

Check the due date each time you review the list, and adjust the transfer straight away. A bill that moves earlier does not have to be a crisis if you change the figure as soon as you know.

Review the list every three months

At each review, check three things. Has a cost changed? Has a bill been paid, so the fund can close or reset? Has a new irregular bill appeared? Update the monthly transfer and the due date for each goal, and remove any goal that no longer applies. A short review keeps the fund accurate, and it stops old goals from quietly tying up money.

Common mistakes to avoid

• Leaving a bill off the list, so the money is short when it arrives.
• Borrowing from one fund to pay another bill, and not rebuilding it before the next due date.
• Setting the transfer too high, then stopping after two months. Start with an amount you can keep.
• Keeping the fund in an account where it is easy to spend by mistake.

A checklist for sinking funds

1. List every bill that does not come monthly.
2. Add up the last 12 months of irregular spending.
3. Estimate the cost of anything new you expect.
4. Divide each cost by the number of months until it is due.
5. Add the amounts to find your total monthly transfer.
6. Open a separate account or labelled sub-goals.
7. Set an automatic transfer on payday.
8. Review the list every three months.
9. Use each fund only for the bill it was set up for.
10. Rebuild any fund you use before its next due date.

Frequently asked questions

What is the difference between a sinking fund and an emergency fund?

A sinking fund covers costs you know are coming. An emergency fund covers surprises. Keep them separate, so that paying for a car service from your sinking fund does not leave you without a safety net. The guide to building an emergency fund explains how to set a target for that.

What if I cannot estimate the cost?

Estimate it, then adjust. A rough figure is better than none. Check the amount at each review and change the monthly transfer if the cost moves.

Should I invest my sinking funds?

For bills due within a few years, most people keep the money in a safe, easy-to-reach savings account. Investments can fall in value just when you need the money. Speak to a qualified adviser before you invest for any goal.

Is a sinking fund the same as a budget?

Not quite. A budget plans your monthly spending. A sinking fund makes irregular costs part of that plan, so they stop feeling like surprises. Use both together. The 50/30/20 budget calculator can help you find room for the monthly transfer.

Sources

• YNAB, What is a sinking fund?
• Chime, What is a sinking fund and why do you need it?
• SuperMoney, What is a sinking fund? How to save for expenses you know are coming
• Citi, A guide to saving for unexpected expenses (dated August 2026)

This article is general education, not personal financial advice. The example figures are made up. Adjust them to your own costs.