Sinking Funds: How to Budget for the Holidays

By Cedar & Ledger

Every year the holidays cost money, and every year they still seem to catch people off guard. The same goes for car registration, annual subscriptions, back-to-school, and insurance paid twice a year. None of these are surprises. They're just irregular. A sinking fund turns one big bill into small, boring amounts you set aside ahead of time.

What a sinking fund is

A sinking fund is money you save on purpose for a specific cost you already know is coming. It's different from an emergency fund, which is for things you can't predict. "Holidays, $600, by December 1" is a sinking fund. "The car broke down" is an emergency.

Step by step

1. List your irregular costs. Look back over last year's bank statements for anything that didn't happen monthly: gifts, travel, holiday food, car registration, annual renewals, school costs, birthdays.
2. Give each one a target and a date. Use last year's real number if you have it. For the holidays, include gifts, food, travel, decorations, and the extra events people forget.
3. Divide by the time left. Target ÷ number of paychecks (or months) until the date = what to set aside each time. $600 for holidays with 12 biweekly checks left is $50 a check.
4. Set it aside on payday. Move it to a separate savings account or keep a running total per fund. Automatic transfers help, but a weekly note works too.
5. Spend from the fund, not from the month. When December comes, the gifts come out of the holiday fund, so your regular budget doesn't take the hit.

If you're starting late

If the holidays are a few weeks away, the per-check number may be too big. That's fine. Options:

• Lower the target. Decide on a gift limit per person now, before shopping.
• Save what you can and cut the gap. Fewer gifts, a gift exchange, or homemade food all shrink the number.
• Start next year's fund in January. Even $10 a check adds up to about $260 by December.
• Planning a trip, too? How to Budget for a Vacation walks through the same method for a trip fund, with example numbers, and How to Save for Several Goals at Once shows what to change when all your funds together cost more than you can save.
• Plan part of a tax refund for it. If you expect a refund in spring, deciding now to put a slice into next year's holiday fund helps; see What to Do With Your Tax Refund.

Common snags

• Too many funds at once. Start with the 2 or 3 biggest costs. Add more later.
• "Borrowing" from a fund. It happens. Write it down and pay it back over the next few checks.
• Guessing too low. After the event, compare what you spent to the target and adjust next year's.

Tools

A notebook or a few savings accounts with nicknames work fine. If you'd like a spreadsheet, the Savings Goals Tracker ($5, Excel and Google Sheets) lets you set a target and date for each fund and shows how much to set aside each paycheck and how far along you are.

This is general information, not financial advice. Cedar & Ledger makes plain spreadsheet templates for money and small business: cedarandledger.vercel.app.

Try the free sinking fund calculator (how much to save per paycheck) →

Try the free holiday gift budget calculator →

Related template: read about the savings goals template

See all Cedar & Ledger templates

Also see: Wedding budget