Sinking fund

The cost is known before it arrives: an insurance premium paid once a year, a property tax bill, a car registration, an annual membership. A sinking fund spreads it across the months before the due date, so the month the bill lands is paid from money already set aside rather than from that month's income.

A sinking fund and an emergency fund both set money aside. A sinking fund is for a cost with a known amount and a known date; an emergency fund is for a cost that isn't known in advance.

On a monthly basis, a $1,800 premium paid once a year is a recurring cost of $150 a month, whether or not the money is set aside ahead of it. The sinking fund is what turns that monthly figure into a balance that exists before the bill does.

The name comes from corporate finance, where a sinking fund is money a company sets aside over time to retire a bond when it matures. The household version is the same idea at a smaller scale.

A car insurance premium of $1,800 is paid once a year, each March. Divided across the twelve months between one premium and the next, that is $150 a month. When the bill arrives, the fund holds $1,800 and the month's other spending is unchanged.

Started in September, six months before the bill, the fund holds $900 by March at the same $150 a month. The other $900 is paid from that month's income, and from the following March on, the full premium is in the fund.

Annual premium

$1,800

Months between premiums

÷ 12

Monthly contribution

$150

A bill that lands once a year is missing from eleven months of the budget and arrives in the twelfth at twelve times its monthly cost. A sinking fund puts the same $150 in each month, so the month with the bill in it reads no differently from the others.

The monthly amount is the cost divided by the months until the bill. A later start divides the same cost by fewer months, and a fund started with only six months to go has half the premium set aside by the due date.

Taiga Finance doesn't use the term; a sinking fund is a savings fund on the Savings page with a target amount and a target month. “Create a savings fund” takes a “Name”, a “Monthly contribution ($)”, a “Target amount ($)”, a “By month” and the “Fund account” the money sits in. The fund's row then shows a progress meter, its balance and a status chip: the month the monthly contribution reaches the target, such as “~Mar 2027”, with “· after date” added when that month falls after the target month, and “Funded” once the balance reaches the target.

The monthly contribution is a savings line on the Plan; the create drawer says so beside the field. On the Plan, the line shows the fund's balance against its target, such as “$27,550 of $40,000”, with a meter that fills toward the target. The contribution sets the plan and moves no money; the fund's balance changes when its allocation changes.

When the bill is paid, the transaction can be tagged to the fund with “Funded by”, and the fund's balance goes down by it.