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Sinking Funds: Your Key to Budgeting Success

by | Dec 5, 2018 | Budgeting

Budgeting isn’t easy. It can be time-consuming and frustrating.

It’s frustrating to spend an hour budgeting only to find out that you forgot the six-month auto insurance bill is due. Or maybe it’s an annual life insurance premium.

Either way, these surprise, lumpy expenses can kill your motivation to budget.

Last week I talked about the importance of budgeting and provided some worksheets to help you get started. This week, I want to focus on one of those worksheets: the Sinking Fund.

Sinking funds are the solution to one of the biggest budget busters: lumpy expenses. Let’s find out how they work.

Turn Lumpy Expenses Into Predictable Monthly Expenses

Sinking funds help you smooth out expenses that you only incur a couple times a year. Some examples of these expenses are:

  • Auto & Home Insurance
  • Life Insurance
  • Real Estate Taxes
  • Christmas Gifts
  • Glasses & Contacts
  • School Expenses
  • Home or Auto Maintenance

These expenses tend to be large and infrequent, which is why I call them budget busters. When I first started budgeting, these lumpy expenses would drive me crazy. They even caused me to quit budgeting a couple of times.

But I learned to deal with them by using a sinking fund.

What do you need?

  1. The checking account that you pay bills from
  2. A separate checking or savings account where you will store Sinking Funds
  3. Our Sinking Funds worksheet

The goal with sinking funds is to turn lumpy expenses into a predictable monthly expense.

For example, suppose you have a six-month auto insurance policy that costs $750. You can look at that expense as a $750 expense every six months. Or you can look at it as a $125 expense every single month ($750/6 months).

How a Sinking Fund Works

We’ll continue with the example of the $750 auto insurance premium that needs to be paid every six months. 

Graphically, the sinking fund works like this:

You’ll transfer $125 to the Sinking Fund each month for six months. Then, when it’s time to pay the $750 auto insurance premium, you transfer $750 from your Sinking Fund back to your Checking Account. Pay the bill, and then start the process over again for the next six months.

You’ve transformed a big, lumpy expense into a manageable, predictable monthly expense. 

Transform All Your Lumpy Expenses

Now, using our Sinking Funds Worksheet, you can transform all your lumpy expenses into a predictable, monthly expense. When you need to make a payment, just take the money out of your Sinking Fund and pay it.

As you zero in on those lumpy expenses and figure out what the monthly “cost” is, you can transfer the total of those amounts to your Sinking Fund each month.

For instance, on the first of every month, I automatically transfer money from our checking to our Sinking Fund account. This amount includes everything you see listed in the above worksheet. Then, as I need to pay our lumpy expenses, I move the money I need back to our checking account.

Smooth Transition to Using a Sinking Fund

I want to give you a head’s up to one issue that you may run into when you start using a Sinking Fund.

Depending on when you start, you may be in the middle of your payment cycle. For example, suppose you’re starting your Sinking Fund and your six-month auto insurance payment is due next month. You’re “supposed” to have $625 already saved up for this expense ($125/month x 5 months).

One option is to go ahead and stick the $625 into your Sinking Fund account when you first open it. Next month, you’ll transfer $125 over. And when the payment is due, you’ll take the full $750 out of your Sinking Find and move it to your checking account.

Another option is to simply wait until after you pay the next premium. Once the premium is paid, you’ll start sticking $125 per month into the Sinking Fund to save for the next premium due date.

All this depends on your cash flow and whether you have the funds available to put into your Sinking Fund when you first start. Do whatever works best for your family.


Budgeting is really important. I can’t emphasize that enough. Yeah, I know it’s a pain the butt and can feel constricting at first.

But when you combine our budgeting process with an emergency fund, you’ve just created a solid financial foundation for your family.

I created Budgeting Worksheets in Microsoft Excel, including the Sinking Funds Worksheet. You can download the Excel file here:

If you have any questions about budgeting or how to use sinking funds, please comment below. I want to see you succeed with your money, and will answer any question that helps you clarify how to budget effectively.



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