How Sinking Funds Have Changed How I Save

I thought I was doing the right thing having a general ‘savings’ account when I first started my financial journey. But I’d end up dipping into it every time an expense came up like car insurance, or a weekend away. And it wasn’t until I opened a Monzo account and had the pots functionality that I really thought about sinking funds.

Sinking funds are a simple but severely underrated budgeting method that’s helped me. If you’ve not heard of them, or aren’t quite sure what they are here’s how I use them to manage my money, and how they might help you too.

What are sinking funds?

A sinking fund is money you set aside (once or regularly) for a specific future expenses. It’s not general savings for a rainy day, and it’s not an emergency fund. It’s a targeted pot of money for things you know are coming up.

So instead of panicking when these expenses pop up you’ve saved the money in advance.

Sinking funds we have

Here are some sinking funds that we save for:

• Christmas- We save throughout the year so we’re not stressed in December.
• Birthdays and gifts- We spread the cost across the year so we don’t have those big months with lots of presents to buy.
• Vehicle expenses- This usually covers the car insurance, MOT’s, services and any extra bits we need.
• Entertainment subscriptions- We pay for Prime and Disney+ annually so we save a little money each month to cover these expenses.

In the past we’ve had sinking funds for weekends away, larger holidays and weddings. We’d work out how much we needed and how many months we had to save. Once we had a monthly figure we’d save that into the pot each month to cover the expense.

How I use sinking funds in practice

Sinking funds are part of our everyday budget now. Some come from our regular household expenses (like the one’s above), and then some come from my personal fun money if I know I have something planned.

Let’s say your car insurance is £360 a year. Rather than getting hit with that full cost in one month, you divide it by 12 and set aside £30 a month in a dedicated savings pot. For our vehicle expenses I work out roughly over the year how much car insurance, two vehicle MOTs, two vehicle services and some extra money is and split it to a weekly amount to save.

You can do this with as many categories as you want. I personally use Monzo pots as I find it the easiest to manage. You could use a single savings account and mark sinking funds in a spreadsheet. You could use a separate savings account, or even a physical cash envelope system – whatever suits you.

Why it works so well

Sinking funds help us smooth out our budget so bigger costs become manageable monthly amounts. This was especially helpful when we were paying off our cruise last year as it was a big cost, but we had about 21 months to save which made it more manageable.

As we plan for everything we know is coming there’s generally no surprise bills that pot up unaccounted for. Plus we generally save money by paying for insurance policies up front, and it saves on any potential interest that using a credit card could cause.

Final thoughts

Sinking funds might not sound glamorous, but they’re one of the smartest money habits I’ve picked up. They’ve helped me feel more prepared, less anxious, and way more in control of my spending — and honestly, it’s such a simple tweak.

If you’re constantly getting caught off-guard by irregular expenses, give sinking funds a try. Start with just one or two categories, and build from there. Future you will seriously thank you.

Do you use sinking funds already — or are you planning to start?