Sinking funds: how to plan for irregular bills

Your budget works fine for months, then March arrives with the car insurance and the whole thing falls over. The bill was not a surprise. You knew about it last year. It just landed on one month that was never planned to carry it.

Sinking funds fix this. You spread a known, irregular bill across the year in small monthly shares, so the month it arrives looks like any other. This guide covers how to work out the shares, plus two related problems: months with an extra paycheck, and income that changes from month to month.

What is a sinking fund?

A sinking fund is money set aside each month for a cost that comes once or twice a year. Car insurance, a yearly subscription, holiday gifts, a car registration, the dentist. None of them is an emergency. All of them are predictable. The only thing that makes them painful is timing.

The arithmetic is simple: take the yearly total, divide by twelve, and set that share aside every month. The money waits; the month the bill comes, the fund pays it.

How to calculate a sinking fund

Car insurance is $640 in March and $640 in September. That is $1,280 a year, or about $107 a month. By March the fund holds what the bill needs, and March looks like every other month.

Most households have more of these than they think. Here is a typical list:

Irregular bill	When	Yearly total	Set aside a month
Car insurance	March, September	$1,280	$107
Holiday gifts	December	$600	$50
Car registration	May	$180	$15
Yearly streaming plan	August	$139	$12
Dentist and glasses	Through the year	$400	$33
Total		$2,599	$217

Two hundred and seventeen dollars a month sounds like a lot until you notice it was always being spent. It was just being spent all at once, usually from a card.

What if the fund starts late?

If you start in January and the insurance is due in March, two months of $107 will not cover $640. You have two honest options: set aside more for the first few months, or accept that this first March will be tight and plan a smaller month before it. From the second year on, the fund runs on its own.

Paychecks and the extra-paycheck months

If you are paid every two weeks, you get 26 paychecks a year, not 24. That means two months each year bring three paychecks instead of two.

With $2,450 every other Friday, most months bring $4,900 and two months bring $7,350. The mistake is to plan around the average, about $5,308 a month, because in ten months out of twelve that money does not exist.

Plan every month on two paychecks. Then give the third paycheck a job before it arrives: a debt, a sinking fund, a goal. Weekly pay works the same way: four or five months a year bring a fifth payday.

Irregular income: plan on the lean month

Freelance work, commission and tips make some months rich and some thin. A budget built on the average breaks in every thin month.

Plan on what you can count on in a lean month instead. Say freelance income averages $550 but swings between $0 and $1,000. Plan on $300. A $1,000 month leaves $700 over, which goes into a buffer. A $0 month takes $300 from it. Over a year, the buffer smooths the swings, and the plan never relies on money that has not arrived.

If your income is irregular, your emergency fund also needs to be larger than usual. Our guide to emergency funds and the savings rate goes into how many months to aim for.

How to spot the lowest point in your account

Sinking funds change how your account balance moves. Money goes in on paydays, regular bills go out on their dates, and irregular bills leave in the month they are actually paid. So the balance dips.

Draw it month by month from today’s balance and look for the lowest point ahead. If it stays above zero, the plan holds. If it goes below zero, one month will not cover itself, and you know which one. Move a cost, set more aside earlier, or plan a smaller month before it.

It also helps to separate two numbers: the balance, and the part of it that is not already set aside for irregular bills. The second number is the money you can really spend.

Common mistakes with sinking funds

• Mixing the fund with spending money. If it all sits in one balance and you cannot see what is promised, the fund gets spent. Track it separately, even if it lives in the same account.
• Too many tiny funds. One fund per real bill is enough. A “miscellaneous” fund usually becomes a second spending account.
• Forgetting price increases. Insurance and fees go up. Update the yearly total when the renewal letter comes. Our guide to planning a yearly budget shows how changes over time work.
• Using the emergency fund for a known bill. If you knew it was coming, it belongs in a sinking fund.

How Money Kit helps with irregular bills

In Money Kit, you tick “Set money aside every month for it” on any irregular line, and the kit divides its yearly total by twelve and asks each month to carry that share. The Bills page lists every fund with its next due month, what is in it and whether it is ready or how much short, and it names any irregular cost that is not being set aside. A paycheck line needs only one payday; the kit finds every one after it and marks extra-paycheck months with a +. A varying income line is planned on the amount you choose. On the Overview, the account chart walks month by month from your starting balance, shows what is not set aside as a dashed line, and marks the lowest point ahead.