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Lesson 4

Sinking funds guide

A sinking fund is money you set aside monthly for a cost that is predictable but not monthly.

Annual billsDivided by 12
Less panicFuture costs visible
Not emergencyDifferent pot
Workbook readySavings Goals tab
Definition

A sinking fund is not fancy

If car insurance is GBP 600 once a year, the real monthly cost is GBP 50. If Christmas normally costs GBP 720, the real monthly cost is GBP 60. If the school uniform hit is GBP 300 each summer, the monthly cost is GBP 25. A sinking fund simply tells the truth earlier.

MoneyHelper's budgeting guidance notes that costs can be entered annually where they vary or do not happen monthly. That is the same mental model. You turn irregular costs into monthly set-asides so the bank balance is not lying to you.

Common funds

The normal household list

Car and transport

MOT, servicing, tyres, insurance excess, repairs, train season ticket, parking permits.

Home

Boiler service, appliance replacement, repairs, furniture, insurance excess.

Family

Christmas, birthdays, school uniform, trips, childcare gaps, prescriptions.

Admin

Annual insurance, professional fees, memberships, tax bills, passport renewals.

Formula

The simple calculation

Monthly sinking fund = expected cost / months until needed. If a GBP 480 car repair target is due in eight months, set aside GBP 60 a month. If you can only set aside GBP 30, the gap is useful information: reduce the target, extend the date, cut something else, or prepare another route.

Keep learning

Next steps

Sources

Sources and useful guidance