What Is a Sinking Fund?
A sinking fund turns large, irregular costs into small, regular allocations. Here's how they work and how to set one up.
What is a sinking fund?
A sinking fund is money you set aside a little at a time for a cost you know is coming. Instead of a large bill arriving and scrambling to pay it, you've already been saving towards it.
It's different from a general savings account: a sinking fund has a specific purpose and a target amount.
How it works
- Identify the cost — car registration, insurance, Christmas, a holiday.
- Estimate the total and when it's due.
- Divide by the number of pays between now and then.
- Set that amount aside each pay.
For example, if car registration is $860 a year and you're paid fortnightly, that's about $33 per pay. Set aside $33 every fortnight and the bill is already paid for when it arrives.
Examples of good sinking funds
- Car registration and insurance
- Home and contents insurance
- Rates (if not paid with the mortgage)
- Christmas and birthdays
- Annual subscriptions
- Car maintenance
How to set one up
You can run sinking funds in a spreadsheet, with one row per fund. Track the target, the per-pay amount and the running balance. The Sinking Funds tab in Payday Compass does this automatically as you enter your figures.
The point is simple: irregular costs shouldn't be surprises. A sinking fund makes them routine.
Put it into practice
The Payday Compass workbook brings these ideas together in one organised spreadsheet.
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