Christmas falls on 25 December every year. Car insurance renewals land on the same date they always have. Neither is a surprise, yet both have a habit of arriving at the worst possible moment for your bank balance. The gap between knowing a cost is coming and having nothing set aside is exactly what a sinking fund closes.

A sinking fund is a savings pot you feed a small, steady amount each month so a predictable cost never becomes a crisis. Two pots — one for Christmas, one for the car — cover the majority of the annual bills that catch households out. Setting them up takes minutes. The hard part is starting before the bill arrives.

What a sinking fund is (and what it isn't)

Sinking fund is an unglamorous name for a simple idea: you know the money will be needed, so you save it in advance instead of scrambling for it later.

It is not an emergency fund. An emergency fund covers the unknown — a boiler that fails, a job that ends, a flight you have to book at short notice. A sinking fund covers the known-but-irregular: Christmas, insurance, MOT, tyres, school uniforms. Keeping the two separate matters. Raid your emergency fund for a cost you could see coming and you are exposed when something genuinely unexpected happens.

It is also not an investment. The point is not to grow the money; the point is to have it. Anything you would have to sell, cash in or wait weeks to access defeats the purpose.

The mental shift is smaller than it sounds. You are not finding extra money so much as moving money you were always going to spend. The £700 you would have put on a credit card in December becomes £59 a month in a pot — the same money, just paid on your terms rather than the bank's.

Christmas: find out what it really costs

Most people underestimate Christmas badly, because they count presents and forget everything around them. Before you pick a monthly figure, add up a normal year honestly:

• Gifts, including the colleagues, teachers and distant relatives you always forget
• Food and drink for the main days, plus the extra shops in between
• Travel to see family
• Cards, wrapping paper, postage and a tree
• Socialising that only happens in December
• Whatever you buy for yourself in the sales

If the total comes to £700, that is roughly £59 a month. Start in January and it is painless. Start in September and the same £700 means about £233 a month for four months, which is why so many people give up and reach for a credit card instead.

Two refinements are worth making. First, add a modest buffer — 10% is plenty — because the year something unusual happens is also the year you will not want to cut back. Second, if you always spend the same on the same people, list them once and keep the list. Next year's calculation takes two minutes instead of an evening.

The car: the biggest predictable cost people ignore

A car is not really a monthly cost. It is a series of annual bills that arrive without warning. Insurance, MOT, servicing, breakdown cover and tyres are all foreseeable. Repairs are foreseeable too, in the sense that something will always need repairing eventually.

Building the number

1. Look back over twelve months of statements and list every car-related payment.
2. Add the costs that do not appear every year: tyres, a battery, brake pads, the advisory on the last MOT that will become a repair.
3. Add a repair buffer — not because you know what will break, but because something will.
4. Divide the total by twelve and round up to a figure you will remember.
5. Check it against your income before you commit to it.

Say insurance is £450, servicing £250, MOT and breakdown cover £130, and you allow £400 for repairs. That is £1,230 a year, or about £103 a month; £110 leaves a small cushion. Your own figures will differ, but the method does not.

Here is what the pot actually buys you. When the insurance renewal quote arrives in March, you compare it with your fund, transfer the money across and pick the best policy rather than the cheapest monthly instalment. When the garage rings to say the car needs two tyres and a wheel bearing, you are annoyed rather than frightened. That difference — annoyance instead of fear — is the whole return on the exercise.

Where to keep the pots

The money needs to sit apart from your current account, be easy to reach, and feel boring enough that you leave it alone. Workable options:

• A separate easy-access savings account for each pot, named after its purpose
• The "pots" or "spaces" feature in many banking apps — ring-fenced, but all in one place
• A second current account you do not carry a card for
• Premium Bonds, though withdrawals take a few working days

Avoid fixed-rate bonds, notice accounts and anything with a withdrawal penalty. The money has to be there the day the bill lands.

Automate it, then stop thinking about it

A sinking fund that relies on you remembering to transfer money each month will fail by March. Set up a standing order for the day after payday, while the money is still in the account.

• Name the accounts clearly: "Christmas", "Car" — not "Savings 2"
• Round the monthly amount up; odd numbers get spent
• Keep the pots away from your card and your phone's tap-to-pay
• Review once a year, or straight after a large bill, and adjust the amount

If payday varies, set the standing order for the latest date you are normally paid. Two days of delay costs you nothing. A missed transfer because the money had not arrived yet is the sort of small failure that turns into abandoning the whole system.

The first year is the hard one

There is an obvious problem with saving for an annual cost: the first bill arrives before the pot is full. Two ways round it.

The honest one is to accept a short first year and top up from wherever you can — sell something, trim a subscription, take the smallest possible hit. The pot still does its job next year.

The gentler one is to split the difference. If Christmas is four months away and you need £700, aim for £175 a month and put the remaining £400 on the lowest-interest option you have, then clear it before January. You have not avoided the cost; you have simply stopped it arriving all at once and unplanned, which is the part that hurts.

Common mistakes that empty a sinking fund

• Using one pot for everything. Merged pots make it impossible to tell whether you are ahead or behind.
• Setting the amount too high. A fund you cannot sustain for twelve months is worse than a modest one you can.
• Borrowing from it in a good month. "I'll put it back next month" is how sinking funds die.
• Forgetting the boring bills. Subscriptions, annual memberships and car tax belong in a pot too.
• Never reviewing it. Insurance goes up, children get older, cars get older. A figure set three years ago is probably wrong.

You cannot stop December from arriving. You can stop it from arriving on a credit card statement.

Start with one pot, even a small one. The first time a bill lands and the money is already sitting there, waiting, the habit stops feeling like a sacrifice and starts feeling like the obvious way to run your money.

Photo: JillWellington / Pixabay