Sinking Fund Calculator

Last updated: 2026-05-19

What is a sinking fund?

A sinking fund is a pool of money built up through equal, regular deposits into a dedicated account to meet a specific future expense — a car replacement, a home renovation, a vacation, or any other planned one-time cost. Unlike a general savings account that grows indefinitely, a sinking fund has a target balance and an end date, and the entire balance is spent when the goal is reached. The term originates in corporate-bond finance, where a company sets aside money each year into a fund that "sinks" a debt by accumulating enough to redeem the bonds at maturity; in personal finance the same mechanism applies to any purpose-specific savings goal.

How a sinking fund accumulates

A sinking fund has three core inputs: a target amount (or a fixed payment), an interest rate, and a time horizon. Each deposit earns interest, and because the deposits repeat at fixed intervals, the balance compounds across every period. Each deposit can be treated as an independent investment that grows at the per-period rate for the remaining number of periods; summing those independent investments gives a geometric series that reduces to a single closed-form expression — the future value of an ordinary annuity. The "ordinary" annuity assumes deposits arrive at the end of each period; deposits made at the start of each period accumulate fractionally more, but the difference is rarely meaningful for practical sinking funds.

Formula

The future value of an ordinary annuity is

where PMT is the periodic payment, i is the interest rate per period (r ÷ m for annual rate r and m periods per year), and n is the total number of deposits (years × m). Solving backwards for PMT gives the periodic deposit required to reach a specific FV:

When the interest rate is zero, both expressions collapse to the simple split of the target across the deposits: $FV = PMT \times n$.

Worked example

Suppose the goal is $8,500 for a car down payment in three years, held in a high-yield savings account earning 4 % per year, compounded monthly.

• Annual rate r = 0.04; monthly rate i = 0.04 ÷ 12 ≈ 0.003333
• Duration: n = 3 × 12 = 36 months
• Required monthly payment: approximately $222.23 per month

Substituting into the payment formula:

After 36 months the out-of-pocket deposits total $222.23 × 36 = $8,000.28; the remaining $499.72 comes from interest. Compared with saving the same nominal amount at zero interest ($8,500 ÷ 36 ≈ $236/mo), interest covers about $14 per month of the goal.

Contribution frequency

For the same annual total, more frequent deposits compound more often and produce a slightly larger final balance, though the effect is smaller than it might appear at typical savings rates. The table below compares $3,600 saved per year at 4 % over five years:

The monthly schedule produces about 2 % more than annual at 4 %, because each month's deposit has slightly more time to compound. The gap widens at higher rates or longer terms.

Sinking fund vs. savings account

The distinction between a sinking fund and a regular savings account is one of purpose and horizon. A regular savings account accumulates indefinitely and may begin with an initial lump sum already in the account. A sinking fund always starts from zero — built up purely through contributions — and has a defined end date at which the entire balance is spent.

For a goal that already has some money set aside, one option is to reduce the target by the amount saved and enter the net remaining goal here. The alternative is Savings & Investment Calculator, which accepts both an initial deposit and regular contributions.

Choosing an interest rate

Sinking funds are typically short-to-medium horizon (1–7 years), so the savings vehicle should match that horizon:

• High-yield savings accounts: 3–5 % in a typical rising-rate environment. Liquid and insured.
• Money-market funds: 3–5 %. Slightly higher but less liquidity for very short-term needs.
• Short-term CDs (certificates of deposit): 4–5.5 %. Better rates but lock up the money.
• Bond funds: 3–5 % longer-run average. Appropriate only if the horizon is flexible.

Equity-like returns (7–10 %) are not appropriate for a sinking fund with a fixed end date: equities can drop 30–50 % in a year, and the money may be needed exactly when the market is down. The rate entered should reflect the actual account where the fund is held.