Sinking funds: the part of a budget most people are missing

A budget that balances every month and still ends the year in an overdraft is usually not a spending problem. It is a timing problem: the costs that arrive once a year were never in the monthly plan.

Insurance, the car service, Christmas, the boiler check, the holiday, the school shoes. None of them are surprises. They only behave like emergencies because nothing was set aside for them.

What a sinking fund is

A pot for one known, irregular cost, filled a little at a time. Divide the annual amount by twelve and move that much each month. When the bill arrives, it is already paid for — the money is not being found, it is being collected.

It is not an emergency fund. An emergency fund is for the thing you did not see coming; a sinking fund is for the thing you can see coming and keep pretending you cannot.

Working out the monthly figure

1. 1List every cost that arrives less often than monthly, with its real amount and the month it lands.
2. 2Divide each by twelve — or by the months left until it lands, if it is sooner than a year away.
3. 3Add the results. That total is what your monthly budget was quietly short by.
4. 4Start with the two or three that would hurt most, not with all of them. A funded car service beats nine empty pots.

The funds worth starting with

• Car: service, tyres, tax, MOT. The most reliably underestimated of the lot.
• Christmas and birthdays: the one everybody knows about and nobody funds.
• Home: the boiler service and the one appliance a year that dies.
• Annual bills: insurance, licences, subscriptions you keep on purpose.
• Tax, if you are self-employed. This is a sinking fund with a deadline and a penalty attached.

Where to keep them

One savings account is enough as long as the pots exist on paper. Splitting into five accounts feels organised and mostly creates admin. What matters is that the balance is divided somewhere you can see it, so the Christmas money is not accidentally spent on tyres in March.

Update it on payday, in the same five minutes each month. The first year is the hard one. By the second, the bills that used to arrive as bad news arrive as paperwork.