Sinking funds explained with a 12-month UK example

SYM TeamUpdated Budgeting

A sinking fund is money you set aside each month for a known cost that does not arrive monthly, such as car insurance, Christmas or a holiday, so the bill is already covered when it lands. You add up the yearly cost of each item, divide by 12 and save that amount every month. The catch, which most explanations skip, is the first year: if a big bill is due soon after you start, dividing by 12 will not have saved enough in time.

This page follows one example household through a full year, month by month, to show how that plays out and how to fix it. For help listing your own costs and choosing where to keep the money, see our guide to working out sinking fund amounts.

The example household's irregular bills

Our example couple pay these costs once or twice a year. The figures are illustrations; swap in your own.

BillDueYearly costPer month
Car insuranceMarch£540£45
TV licenceApril£180£15
MOT and serviceJune£300£25
Summer holidayAugust£1,200£100
Annual subscriptionsOctober£120£10
ChristmasDecember£600£50
Total-£2,940£245

The TV licence is £180 a year from April 2026. Everything else will vary by household, which is why it is worth checking last year's statements for the real amounts.

Month by month: one shared pot

Say they start in January with nothing saved and put £245 into one savings pot on the 1st of every month, paying each bill from it when due:

MonthIn minus billsBalance
January+£245£245
February+£245£490
March+£245 - £540£195
April+£245 - £180£260
May+£245£505
June+£245 - £300£450
July+£245£695
August+£245 - £1,200-£260
September+£245-£15
October+£245 - £120£110
November+£245£355
December+£245 - £600£0

Over the year the total is exactly right: £2,940 in, £2,940 out. But the holiday falls before enough has built up, so the pot runs £260 short in August and is still overdrawn in September. Because the year ends at £0, the same shortfall happens again next year unless something changes. This timing gap is the main reason people say sinking funds "did not work" for them.

Fix 1: save more for bills that are due soon

In the first year, work out each fund separately as the cost divided by the number of months until it is due, then drop to the normal monthly amount once it has been paid:

BillFirst year, until dueAfter that
Car insurance (March)£180 for 3 months£45
TV licence (April)£45 for 4 months£15
MOT and service (June)£50 for 6 months£25
Holiday (August)£150 for 8 months£100
Subscriptions (October)£12 for 10 months£10
Christmas (December)£50 for 12 months£50

That means saving more in the first few months (£487 in January to March), falling as each bill is paid until it settles at £245. If that is not affordable, use one of the next fixes. The savings goal calculator works out the monthly figure for any amount and date.

Fix 2: seed the pot or move the goalposts

  • Seed it once. If the pooled pot starts with the largest shortfall (£260 in our example), it never goes below zero and £245 a month works forever. A tax refund, bonus or a month of tighter spending can provide the seed money.
  • Shrink or move a big item. A cheaper or later holiday in the first year gives the fund time to catch up.
  • Think twice about paying monthly. Spreading car insurance into monthly instalments removes the lump sum, but insurers often charge interest for it, so it can cost more over the year. Saving for an annual payment is usually cheaper once your fund is established.
  • Do not borrow from your emergency fund. It is there for the unexpected, not for bills you knew were coming. If you do dip in, pay it back first.

One pot or several?

A single shared pot is simpler to set up, but as the table shows, it can hide a shortfall until a bill arrives. Separate pots, one per bill, make it obvious whether each one is on track, and many UK banks and building societies let you open named pots or multiple easy access accounts for free.

A middle way is two or three pots grouped by type: car, home and annual bills, and celebrations and holidays. Keep the money in an easy access account that pays a decent rate, separate from your current account. Our savings accounts guide explains how to compare rates, and sinking fund categories lists costs people often forget.

Keep it running

Once a year, ideally when the biggest bill arrives, check each fund against what the bill actually cost and adjust the monthly amount. Prices for insurance and holidays in particular change from year to year. Add new items as they come up, such as a pet, a new car or school trips.

Set the transfer for the day after payday and include the total in your budget planner as a fixed bill. If you like seeing progress day by day, SYM tells you how much to put aside today and logs it with one tap.

Frequently asked questions

What is a sinking fund in simple terms?
It is money you put aside regularly for a cost you know is coming, such as car insurance or Christmas. You divide the cost by the number of months until it is due and save that amount each month, so the bill is covered when it arrives.
How is a sinking fund different from an emergency fund?
A sinking fund is for predictable costs with a rough date and amount. An emergency fund is for the unexpected, such as losing your job or an urgent repair. Keep them separate so planned spending does not empty your safety net.
How do I start a sinking fund if a bill is due soon?
Divide the bill by the number of months left until it is due, not by 12. That gives a higher amount at first, which drops to the normal monthly figure once the bill has been paid. If that is too much, seed the fund with a one-off lump sum.
Should I keep sinking funds in one account?
One account is simpler, but it can hide a shortfall in one fund behind money saved for another. Separate pots, or two or three grouped pots, make it easier to see what is on track.
How many sinking funds should I have?
Enough to cover your main irregular costs without becoming hard to manage. Many people start with three to six, such as car, home, gifts and Christmas, holidays and annual bills.
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