Sinking fund

How it works

A sinking fund turns one large payment into smaller ones made ahead of time. The math is simple: take the expected cost, subtract whatever is already set aside for it, and divide what remains by the number of deposits left before the due date. The money can sit in one savings account with each fund tracked by name, or in separate accounts if that is easier to follow.

The idea suits costs that do not arrive every month, which a monthly budget can easily miss: insurance billed once or twice a year, school costs, gifts, travel or replacing a phone or laptop. Setting a fixed amount aside each month means the bill does not have to come out of a single paycheck or go on a credit card. An automatic transfer timed to payday can keep the deposits on track.

A sinking fund is easiest to manage when each one has a clear purpose and a date. Starting late raises the deposit needed, so listing the year’s known bills in advance helps. After the bill is paid, the fund can start over for the next cycle at the new expected price. Keeping this money separate from emergency savings stops the same dollars from being counted twice.

Related terms

Sources and further reading

• CFPB: Improving cash flow
• FINRA: Callable bonds and sinking fund redemptions

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.