Sinking fund
Saving a little each period for a known expense that is not due yet.
A sinking fund is money set aside gradually for an expense you know is coming but is not due this period — car registration, insurance, an annual software renewal, Christmas. Rather than absorbing the whole cost in the month it lands, you divide it across the months before it and save that slice each time. It turns an irregular expense into a regular one.
Worked example
Car registration is $880 and falls in March. Starting in April, you put $74 aside each month. When March comes the $880 is already there, and no other category has to be squeezed to find it. Without the fund, March is a month where something else gives.
Common mistake
Keeping sinking funds in the same mental pot as everyday savings, so the balance looks like progress towards a goal when most of it is already committed to registration and insurance. Track each fund separately or the number flatters you.
Related terms
Zero-based budgeting
Assigning every dollar of income a job until nothing is left unassigned.
Envelope budgeting
Setting aside a fixed amount per category, where what is left carries forward.
Burn rate
How much money you are spending per day or per month, on average.
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Questions about this term
Sinking fund: common questions
- How much should I put into a sinking fund each month?
- The expense divided by the months until it lands. Car registration of $880 due in March, saved from April, is $74 a month; when March comes the money is already there and no other category has to be squeezed. The fund turns an irregular expense into a regular one.
- Is a sinking fund the same as general savings?
- No — and keeping them in one pot is the common slip. Most of a sinking fund is already committed to registration, insurance or a renewal, so the balance flatters you if it is read as progress towards a goal. Track each fund separately so the number means what it looks like.
- What kinds of expenses suit a sinking fund?
- Anything you know is coming but is not due this period: car registration, insurance, an annual software renewal, Christmas. The test is predictability — if you can name the amount and the month, you can divide it across the months before it.
- Can I set up a sinking fund in 2Fin?
- Yes — savings goals in allocations are where a sinking fund lives. Set a goal for the known expense and save toward it each period, kept apart from everyday savings so the balance is not mistaken for progress that is already spoken for.
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