This Money Hack Keeps One-Off Expenses From Wrecking Your Budget

A glimpse at your calendar is already cause for anxiety. You’re taking the car in for a tune-up that you know will cost a few hundred dollars or more. Your property tax bill is about to come due, and your niece is getting married so you’ll need to book flights and a hotel. Thankfully, these non-monthly expenses don’t happen every day — but when they do, they can drain your bank account or force you into debt.

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Irregular expenses — expenses that fall outside your regular monthly budget — will come up. You can’t avoid them, but you can avoid being financially ruined by them if you embrace a simple savings trick.

We turned to Thomas Kopelman, co-founder and lead financial planner at AllStreet Wealth, as part of our Top 100 Money Experts series to learn more about how to use an underappreciated savings tool called a sinking fund to handle irregular expenses.

A sinking fund may have a rather ominous name, but its true purpose is far from dire: It’s a savings account (or multiple accounts) where you put money aside for planned, non-monthly expenses so those bills don’t wreck your budget.

Describing a sinking fund to its own customers, Northwestern Mutual offered a succinct explanation of how to use one: “The goal is to set aside enough money to cover this known expense so that you don’t blow a hole through your budget when the bill eventually comes due.”

So what can a sinking fund cover? According to Kopelman, “This could include yearly travel, insurance premiums, property taxes, car maintenance, or your April tax payment.”

It’s easy to confuse sinking funds with emergency funds since they both handle expenses outside of your usual monthly routine. The difference lies in that one is for unplanned emergencies (think a job loss or a surprise medical bill) and the other is for planned, but non-monthly, expenses.

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Using a sinking fund is such a commonsense solution to these intermittent expenses that, surprisingly, the term isn’t more widely used. Personal finance education often emphasizes short-term cash (emergency funds) and long-term investing, leaving the “in-between” category of planned-but-infrequent expenses under-covered. That gap is exactly where sinking funds belong.

“Many people don’t make progress financially because every time a one-off expense comes their way, they’re not prepared for it,” Kopelman said. “This can lead to little savings or added debt — and neither are good.”

Think about it this way: When you’re budgeting for your monthly bills, do you make room for things like annual car registration, holiday gifts, insurance premiums, home repairs or renovations, or seasonal travel? Probably not, because they feel less immediate than everyday needs — until they come due.

While you may already deposit money into an emergency fund every month — and hopefully hold that money in a high-yield savings account — there are some practical differences in how to approach a sinking fund. Most people benefit from multiple sinking funds, each earmarked for a specific planned expense, whereas an emergency fund is more like a giant pot you can dip into when an unexpected crisis arises.

“The best way to plan and prepare is to set up separate high-yield savings accounts for each irregular expense, then put money toward it monthly,” Kopelman said. “If you know your property tax bill is $5,000, save $417 a month to be on track for when it’s due.”

In addition to the sinking funds for the irregular expenses you can anticipate, Kopelman also wants you to maintain an emergency fund for truly unexpected events — the kinds of costs sinking funds aren’t meant for.

If you feel like you’re living paycheck to paycheck, start small: Pick your highest-priority irregular expense (for many people, that’s auto maintenance or holiday gifts), estimate the yearly cost, divide by 12, and begin automating a modest monthly transfer. Even $25 to $50 a month, earmarked consistently, will add up and reduce the need to use credit when the expense hits.

The bottom line is that there’s one thing that’s regular in life — irregular expenses. Something will need to be repaired. Medical emergencies will happen. Someone on your holiday shopping list will have expensive taste.

However, now that you’ve had sinking funds explained, you can budget wisely for these financial shocks and avoid debt from unexpected costs.

This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.

Caitlyn Moorhead contributed to the reporting for this article.

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