Sinking Funds: Save for Predictable Costs Before They Hit

Many “emergencies” are not emergencies. School fees come every January. The car licence arrives every year. Funerals, birthdays, insurance renewals and December are all on the calendar.

A sinking fund turns them from a shock into a small monthly habit.

What is a sinking fund?

It is a savings pot with a purpose and a date. Unlike an emergency fund, which covers surprises, a sinking fund covers things you know about.

What are the 7 costs people save for?

How do you work out each one?

Divide the cost by the months left. Here is a hypothetical example.

If R1,433 a month is too much, start with the most important one and add the others as you can. A smaller fund still covers part of the cost.

How do you set one up?

1. List your predictable costs for the next 12 months.
2. Work out the monthly amount for each.
3. Open a separate account, or use named pots.
4. Set a debit order for payday.
5. Leave the money alone until the cost arrives.

Where should you keep the money?

In a separate savings account you do not use every day. Some accounts let you create named pots, which makes it easy to see each purpose. Choose one with low fees. See bank charges.

What if you cannot save for everything?

Start with the cost that would force you to borrow. School fees and the car licence are common ones. A short-term loan costs far more than saving does: at the legal maximums, a first one-month R2,000 loan can cost about R474. See R2000 loan.

How does it fit your budget?

Include it as a line in your monthly budget, with a name. See zero-based budgeting and how to budget.

For the January school costs, see school fees in January.

What about when you use the money?

Spend it on the cost it was saved for, and start the next cycle. If a cost came in lower, move the extra to another fund or to your emergency fund.

Money you do not need for a year or more could go into a tax-free account. The SARS rules on tax-free investments explain the limits.

What does a year of sinking fund costs look like?

Predictable costs cluster at certain times. A calendar shows what to plan for, and when. Here is a typical year. Adjust it to your own household.

Write the amounts next to each, and add them up. The total, divided by twelve, is the monthly figure you need for a full set of sinking funds. It is usually higher than people expect, which is why they feel like emergencies.

Which sinking fund should come first?

If your total is more than you can save, rank the costs by what would hurt most if you could not pay. Here is a hypothetical example. You can save R800 a month, and the full plan is R1,433.

With R800, you cover the top two completely. When your income rises, or a debt is cleared, add the next one. A partial fund is still helpful.

If the school bill is R6,000 and you have saved R4,000, you borrow R2,000 less, or pay less in instalments.

What if the cost changes?

Prices change, so recalculate when they do. The formula is simple: take the new cost, subtract what you have saved, and divide by the months left.

Here is a hypothetical example. School fees rise from R6,000 to R6,600. You have saved R3,000, and six months remain.

(R6,600 − R3,000) ÷ 6 = R600 a month.

Do this check every few months, so there are no surprises. If you save more than you need, move the extra to another fund or to your emergency fund.

How do you set up named pots?

Many banks let you open extra pockets or sub-accounts inside your account. Give each a name and a target, such as “School 2027 R6,000”. A few tips:

• Fund them by debit order on the day after payday.
• Choose an account with low fees. See bank charges.
• Keep the pots out of your everyday balance, so you are not tempted.
• If your bank does not offer pots, use a spreadsheet to track what is in a single savings account.

How do you run a sinking fund on an irregular income?

If your pay moves, set the monthly amount as a share of what you earn. For example, save 15% of every payment, and divide it between your funds in a fixed split. In a good month, the funds grow faster.

In a lean month, they grow more slowly, but they still grow. Check your progress against the dates once a quarter, and adjust.

What should you do when a sinking fund is not enough?

If a cost arrives and the fund is short, look at the gap first. Ask for instalments, find a cheaper option or use part of another fund, and write down what you moved.

Avoid a short-term loan, because a small shortfall can cost far more than the gap itself.

Then adjust the plan. Raise the monthly amount for next year, or start earlier. A fund that falls short once is a lesson in the right amount, not a reason to stop saving.

Frequently asked questions