The monthly amount is the easy half. The half people miss is the balance the fund must already hold on the day you start, which depends on when the bills fall.
Add up the year's irregular bills and divide by 12: six illustrative bills totalling £2,240 need £186.67 a month. That is only half the calculation. Because the bills do not arrive evenly, the fund also needs a starting balance: begin in October with nothing saved and it is £820 short by March, even though the monthly amount is right.
Worked in full in Personal Finance for Beginners by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Irregular bills are the commonest reason a budget that works on paper fails in practice. A month with car insurance and Christmas in it is not a bad month; it is a predictable one that was never budgeted. A sinking fund turns those bills into a fixed monthly transfer, so that every month looks the same. The arithmetic has two steps, and most guides stop after the first.
| Bill | Month due | Amount | Per month |
|---|---|---|---|
| Car insurance | November | £540 | £45.00 |
| TV licence and subscriptions | December | £180 | £15.00 |
| Christmas and birthdays | December | £600 | £50.00 |
| Home insurance | February | £240 | £20.00 |
| Car service and MOT | March | £380 | £31.67 |
| Dentist and glasses | July | £300 | £25.00 |
| Total | £2,240 | £186.67 |
Monthly amount = sum of the year's irregular bills / 12
£2,240 / 12 = £186.67. In a spreadsheet with amounts in C2:C7: =SUM(C2:C7)/12. On a £3,100 take-home pay that is 6.0 per cent, and it belongs in the budget as a fixed line, alongside rent, not in whatever is left at the end of the month.
Finding the bills is harder than dividing them. Go through twelve months of bank and card statements and pick out every payment that did not happen monthly: renewals, annual subscriptions, the car, gifts, school costs. Where a bill varies, use last year's figure and round up; a fund that ends the year with a small surplus has done its job. Keep the money in a separate easy-access savings account, so that the balance you see in your current account is the balance you can actually spend.
Transfer £186.67 at the end of each month and pay each bill from the fund when it falls due. Starting from nothing in October:
| Month | Bills paid | Bills paid to date | Balance |
|---|---|---|---|
| October | 0 | 0 | 186.67 |
| November | 540 | 540 | −166.67 |
| December | 780 | 1,320 | −760.00 |
| January | 0 | 1,320 | −573.33 |
| February | 240 | 1,560 | −626.67 |
| March | 380 | 1,940 | −820.00 |
| April | 0 | 1,940 | −633.33 |
| July | 300 | 2,240 | −373.33 |
| September | 0 | 2,240 | 0.00 |
The year balances exactly: £2,240 in, £2,240 out. But £1,320 of bills fall in the first three months, against £560 saved, and the fund stays below zero from November until it climbs back to exactly zero the following September. Its lowest point, £820 short in March, is the starting balance the fund needed on 1 October.
Starting balance needed = the most negative point of the running balance, started from zero
In a spreadsheet: a running balance column =D1+186.67-B2, and the starting balance is =-MIN(D2:D13). With £820 in the fund on day one, the balance touches zero in March and is back to £820 at the end of September, ready for the next November.
The starting balance depends entirely on where in the cycle you begin. The monthly amount does not change.
| Start at the beginning of | Starting balance needed |
|---|---|
| October | £820.00 |
| November | £1,006.67 |
| December | £653.33 |
| January | £60.00 |
| April | £0.00 |
| July | £560.00 |
| September | £633.33 |
Start in April, just after the expensive season, and £186.67 a month covers every bill from the first transfer. Start in November and you need £1,006.67 up front. If you cannot find the starting balance, the practical routes are a higher transfer for the first months, or cutting the first year's Christmas budget to what the fund holds. The one to avoid is the default: the shortfall going on a card.
Interest on the fund is a bonus, not part of the plan. An easy-access account will add a little over the year, but the balance swings from high to low and back, so the interest is too small and too uneven to budget for. Size the fund on the bills alone and let any interest build a margin for the bill that turns out bigger than last year's.
Treating total / 12 as the whole answer. It is the right amount for a fund that is already running, and the wrong one for a fund being started. Put the £820 gap on a 22.9 per cent card instead and, repaid from the same £186.67 transfers, it costs about £101.76 of interest in the year: money spent because the bills came early, not because anything was overspent. How card interest accrues on a balance like that is shown in how credit card interest is calculated.
Keep the sinking fund separate from the emergency fund. The emergency fund is for costs you cannot date; the sinking fund is for those you can. Mixing them means a predictable December empties the money meant for an unpredictable one. Sizing the emergency fund is covered in how much an emergency fund should be.
List the bills with their months, divide the total by 12, then run the balance once to find the starting amount. Here that is £186.67 a month and £820 on day one if you begin in October. Personal Finance for Beginners builds the monthly budget that has to produce a surplus, and the free working documents for the book include that monthly budget page and a thirty-day spending log to find the bills you have forgotten.
List every bill that does not arrive monthly, with its amount and month, add them up and divide by 12. Six illustrative bills totalling £2,240 a year need £186.67 a month, 6.0 per cent of a £3,100 take-home pay. That amount keeps the fund level over a full year; whether it covers the first bills depends on the start date.
Because the bills arrive unevenly and the savings arrive evenly. Starting in October, car insurance in November and Christmas in December come before twelve months of saving have built up. At £186.67 a month the fund is £820 short by March and only back to zero in September. It needs that £820 at the start, or a higher saving rate early on.
No. A sinking fund pays for costs you know are coming, on dates you know: insurance, the car service, Christmas. An emergency fund is for costs you cannot date. Keeping them apart stops a predictable bill draining the emergency money. Without either, the £820 shortfall in the example goes on a 22.9 per cent card and costs about £101.76 of interest in a year.
This article is one calculation from Personal Finance for Beginners. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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