A sinking fund is money you set aside each month for a cost you know is coming, such as car insurance, the TV licence or Christmas, so the bill is already covered when it arrives. To set one up, divide the expected cost by the number of months until it is due, move that amount on payday, and keep it in a savings pot or separate easy-access account labelled for that purpose.
This guide focuses on the practical side for UK households: the costs to plan for, how to calculate the monthly amounts and which accounts work best. For the thinking behind the method, see sinking funds explained.
Sinking fund or emergency fund?
The two are often confused. A sinking fund is for costs you can predict, even if they do not happen every month. An emergency fund is for things you cannot predict, such as losing your job or a sudden boiler failure.
| Sinking fund | Emergency fund | |
|---|---|---|
| Purpose | Known, planned costs | Unexpected shocks |
| Amount | Set by each bill | Usually 3 to 6 months of essentials |
| Spent | Every time the bill lands | Only in a genuine emergency |
Without sinking funds, predictable costs end up being paid from your emergency fund or a credit card, which is how many budgets fall apart. Our rainy day fund vs emergency fund guide covers the emergency side, and the emergency fund calculator helps you size it.
List your irregular costs
Go through the last 12 months of bank and card statements and note every cost that does not come out monthly. Common ones in UK households include:
- Car: insurance if paid annually, road tax, MOT, servicing, tyres and repairs.
- Home: home insurance, boiler service, appliance replacement and general maintenance. Homeowners should read why every homeowner needs a maintenance sinking fund.
- Household: the TV licence if you pay it in one go, annual subscriptions and memberships.
- Health: dental check-ups, glasses or contact lenses, and pet insurance excesses or vet bills.
- Family: Christmas, birthdays, school uniforms, school trips and summer holiday childcare.
- Personal: holidays, clothes, haircuts and gifts for weddings.
Work out the monthly amount
The formula is simple: the expected cost divided by the number of months until you need it. If the bill is 12 months away, divide by 12. If it is only five months away, divide by five for this year, then drop to a twelfth once you are caught up.
Here is a worked example. The TV licence and MOT figures are official maximums for 2026/27; the others are examples, so replace them with your own costs from your statements or renewal quotes.
| Fund | Yearly cost | Per month |
|---|---|---|
| TV licence (colour) | £180 | £15 |
| MOT (car, maximum fee) | £54.85 | £4.57 |
| Car service (example) | £240 | £20 |
| Christmas (example) | £600 | £50 |
| Birthdays (example) | £300 | £25 |
| Total | £1,374.85 | £114.57 |
The TV licence rose to £180 from 1 April 2026, and the maximum MOT fee for a car is £54.85, though many garages charge less. Round your monthly amounts up slightly so price rises do not catch you out. The savings goal calculator works out the monthly amount for any target and date, and you can slot the total into the budget planner as a fixed outgoing.
Where to keep sinking funds in the UK
Sinking fund money needs to be easy to reach when the bill arrives, kept separate from your spending money, and ideally earning some interest. The main options are:
- Savings pots or spaces in your banking app. Many UK banks let you create named pots inside your account, which makes it easy to see how much is in each fund. Check whether the pots pay interest, as some do not.
- One easy-access savings account with a tracking sheet. Pay everything into a single higher-rate account and keep a simple note of how much belongs to each fund. Compare rates with the savings rates tool or our guide to high interest savings accounts.
- A regular saver for one big annual cost. Regular savers often pay higher rates on a fixed monthly deposit for 12 months, which suits something like Christmas or a holiday. They usually limit withdrawals, so do not use one for costs that might come early. See regular saver accounts.
- Cash ISA. Rarely necessary for sinking funds. Most basic-rate taxpayers can earn up to £1,000 of savings interest a year tax-free under the Personal Savings Allowance (£500 for higher-rate taxpayers), which covers the interest on typical sinking fund balances.
Set up the transfers once
The point of a sinking fund is that it runs without effort. Set up a single standing order for the total on the day after payday, then split it into pots, either automatically if your bank supports it or with a quick manual move each month.
If you have lots of small funds, group them. Car, home, family and personal is often enough. Too many tiny pots become a chore to manage, and you are more likely to give up. Money in UK savings accounts and pots with an authorised bank is protected by the FSCS up to £120,000 per person per authorised firm, so there is no need to spread small balances across providers.
Spending from a fund, shortfalls and leftovers
When the bill arrives, move the money back to your current account and pay it as normal. If the bill is higher than the fund, cover the gap from your monthly budget if you can rather than your emergency fund, and increase the monthly amount for next year.
If there is money left over, you have two good choices: roll it forward to reduce next year’s monthly amount, or move it to a fund that is running short. The best sinking fund categories for UK households has more ideas on what to include as your budget grows.
Some people like to treat each fund as a small savings challenge. SYM can show how much to put aside today towards a goal like Christmas and keep a streak going, while your bank holds the money.
Frequently asked questions
How do I calculate how much to put in a sinking fund?
How many sinking funds should I have?
Should sinking funds be in a separate bank account?
Is a sinking fund the same as an emergency fund?
Do I pay tax on interest in my sinking fund?
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