We hear it from clients all the time: You’ve put in the work to build yourself a fab monthly budget, complete with all your bills, typical expenses, and wiggle room for fun. It’s going great, until halfway through the month, when you suddenly remember that a big, annual expense is due in a few days. So you adjust what’s left of your budget to make room for it … which might mean saying goodbye to restaurants or shopping or that treat-myself budget for a few weeks.

In the face of budgeting setbacks like these, it’s easy to feel discouraged, like you’ll never feel totally in control of your money no matter what you do. But when it comes to expenses that fall outside your monthly budgeting routine, there’s a way to smooth out the surprises. It’s called a sinking fund, and it’s one of the easiest ways to take the anxiety out of your day-to-day money management.

What’s a sinking fund?

A sinking fund is a pool of money you set aside for known future expenses. Every month, you put money into it, so that by the time an expense rolls around, you’re ready. 

Not only does that mean you won’t have to come up with a big chunk of change all at once; it also makes non-monthly expenses feel like monthly expenses — whether they come up annually, semi-annually, quarterly, or whenever — so you can slot them conveniently into your monthly budget.

Sinking funds vs savings accounts

Hey Ellevest, you might be thinking, that sounds an awful lot like just using a savings account to save up for something. And you’re not wrong! A sinking fund can (and probably should) be kept in a savings account. The difference is that a savings account is just a vehicle — one that can be used for any variety of purposes. A sinking fund is the specific pool of money you’re intentionally building up.

Sinking funds vs emergency funds

Your emergency fund exists to float your budget through unexpected expenses — but the key word there is unexpected. Known future expenses aren’t emergencies, because you can plan ahead for them. And that’s where a sinking fund comes in (and why it should be separate).

What can you use a sinking fund for?

Anything you want! For example, you could use a sinking fund to save up for:

• Annual, semi-annual, or quarterly subscriptions

• Non-monthly automobile or homeowners insurance premiums

• Gifting occasions (December holidays, birthdays, Valentine’s Day, anniversaries, weddings, etc)

• Personal care, like bimonthly hair appointments

• Summer camp or school supplies for kids

• Annual vacations 

• Holiday travel expenses

• Seasonal home maintenance

• A new smartphone every few years (or every year, if that’s your thing — we’re here for it!)

How to create a sinking fund

1. Make a list of future expenses to save up for

First, sit down and list out all the non-monthly expenses you can think of. It can help to look back through a full 12 months’ worth of budgets (or debit / credit card transactions) if you want to feel confident that you got them all. Then decide which expenses on your list you want to save up for.

No predictable, non-monthly expense is too big (or too small) to include. It all depends on how detailed you want to get with it — some prefer the simplicity of only planning for a handful of things, while others crave the feeling of being super thorough. 

It also depends on how much flexibility you have in your budget, and how big of an expense will feel disruptive. It could help to set a dollar amount threshold: “Anything over $X, I will save ahead for; otherwise I’ll just put it in that month’s budget.”

2. Decide where to keep your sinking fund

We typically recommend keeping any money you’re going to need in the next 1–2 years (like your sinking fund!) in an FDIC-insured savings account. The question is more about logistics and organization.

For example, if you’re only saving ahead for a handful of non-monthly expenses, it might be feasible to open a separate savings account for each one. Banks that let you designate “envelopes” for different goals within one savings account are also especially useful for sinking funds. Or, if you’re a spreadsheet kind of person, you could just put all the money into one account and keep track of how much you have saved toward each expense manually. It’s up to you!

3. Figure out how much to set aside each month

Next comes some math — but it’s easy, we promise. For each non-monthly expense you’ll be saving up for, take the total you’ll owe, and then divide that by the number of months you have left to save. That will tell you how much to set aside each month. (For example, if you need $500 for your car insurance premium in five months, you’d save $100 per month for it.)

If you’ll be putting all your sinking fund contributions into one savings account, you can then add all the monthly amounts together. That way, you only have to initiate one transfer.

If you’d rather set money aside out of each paycheck instead of once a month, you can totally do that too. Just divide by the number of paychecks you have left. (So if you have ten paychecks left between now and that $500 car insurance premium, you’d save $50 per paycheck.)

Pro tip: If you’re starting a sinking fund for the first time, you’re probably going to be saving up for annual expenses with less than a year to go (or semi-annual expenses with less than six months to go, etc). In that case, just make sure you redo the math once you’ve paid for the thing and your timeline resets.

(Sound like too much? Never fear: We made you a template. That template is also included in our clients-only 4-Week Money Reset email course!)

How to work a sinking fund into your budget

At Ellevest, there are two budgeting approaches we recommend the most. The first is called the one-number approach. It involves calculating how much money you can afford to spend on “flexible costs” (aka the things that you have to make decisions about) each week, and then you only have to remember that one number on a day-to-day basis. This explainer goes into detail about how to find your number, including accounting for your sinking fund.

Another, more simplified approach we like is the 50/30/20 rule — where 50% of your take-home pay goes to needs, 30% goes to fun, and 20% goes to Future You (saving, investing, and debt payments above the minimums). If that’s more your speed, the most thorough way to account for your sinking fund is to split it up between those three buckets. But the beauty of the 50/30/20 rule is that you can make it yours. So honestly, you could also just put your whole sinking fund allocation into whatever bucket makes the most sense to you.

The more you plan ahead, the more in control you’ll feel

And that’s the beauty of a sinking fund. By transforming your non-monthly expenses into monthly savings, budgeting becomes simpler, and you can feel more confident about your day-to-day spending decisions.

Looking for more help with your spending plan? Join us for our next live Budget How-To workshop with an Ellevest financial planner.