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The short answer
A sinking fund is money you set aside every month for a cost you know is coming, such as rent, school fees or a car service. The monthly amount is the expected cost minus what you have already saved, divided by the months left before it is due; for example, ₦1,800,000 rent due in 12 months needs ₦150,000 a month.
Most money stress in Nigerian households does not come from surprise emergencies. It comes from bills everyone knew about: the landlord's yearly demand, the first-term school fees in September, the car that always needs work after the rains. A sinking fund turns each of these into a small, regular payment to yourself, so the big bill is already covered when it lands.
Sinking fund vs emergency fund
- Emergency fund
- Money for things you cannot predict: job loss, a hospital bill, a sudden relocation. You hope never to use it.
- Sinking fund
- Money for things you can predict in timing or size: rent, fees, vehicle papers, festive travel, a phone you plan to replace. You fully expect to spend it.
Keeping them apart matters. If the rent pot and the emergency pot are the same pot, a medical bill in March quietly becomes a rent shortfall in October.
Not every cost needs a fund. A useful test: if paying it from a single month's salary would force you to borrow or skip another bill, it deserves a sinking fund. Small yearly costs such as a ₦5,000 subscription can simply come out of the spending budget in the month they fall.
The formula
For each cost: monthly set-aside = (expected cost − amount already saved) ÷ months until due. Round up to the nearest ₦500 so small price rises do not leave you short. If the cost recurs, the same pot simply restarts after you pay.
Allow for price rises
Rents and fees often rise between one year and the next. If you expect a rise, add it before dividing. As an example only, a ₦1,800,000 rent with a 10% allowance becomes ₦1,980,000, which is ₦165,000 a month over 12 months instead of ₦150,000.
Worked example: one household's sinking funds
| Cost | Yearly amount | When due | Monthly set-aside |
|---|---|---|---|
| Rent | ₦1,800,000 | Once, in 12 months | ₦150,000 |
| School fees (₦250,000 a term, 3 terms) | ₦750,000 | Sept, Jan, April | ₦62,500 |
| Car servicing and repairs | ₦480,000 | Spread through the year | ₦40,000 |
| Vehicle papers renewal | ₦60,000 | Once a year | ₦5,000 |
| Festive travel | ₦300,000 | December | ₦25,000 |
| Total | ₦3,390,000 | ₦282,500 |
Check: ₦150,000 + ₦62,500 + ₦40,000 + ₦5,000 + ₦25,000 = ₦282,500, and ₦282,500 × 12 = ₦3,390,000, which matches the yearly total. School fees are the awkward line because they fall three times a year. Saving ₦62,500 a month builds ₦250,000 every four months, which lines up with a termly bill only if the terms are roughly four months apart; if your school's first term is the most expensive, save towards that one first.
Starting late: the catch-up calculation
Most people start a sinking fund with the bill already close. Say rent of ₦1,800,000 is due in seven months and you have ₦600,000 saved. The set-aside is (₦1,800,000 − ₦600,000) ÷ 7 = ₦171,428.57, rounded up to ₦171,500 a month. If that is more than you can manage, you have three honest options: talk to the landlord early about paying in two parts, cut a lower-priority sinking fund for a few months, or plan to move to a cheaper place at renewal.
Where to keep the money
- Use a separate pot for each fund, or at least one pot that only holds sinking-fund money. Mixing it with spending money is how it disappears.
- Pick a pot you can reach when the bill is due. A locked product that matures after the rent date is no help.
- Interest helps, but expect tax: banks deduct 10% withholding tax from savings interest, which BusinessDay reported in February 2026 is treated as a final tax for individual savers.
- Transfers cost money when they cross banks. From 1 January 2026, a ₦50 stamp duty is charged to the sender on electronic transfers of ₦10,000 or more, with transfers between your own accounts at the same institution exempt, per Kuda's help centre. One monthly transfer costs less than several small ones above ₦10,000.
A note on rent relief
Employees who pay rent can claim rent relief under the Nigeria Tax Act 2025: 20% of annual rent, capped at ₦500,000, according to PaySpace's summary. On ₦1,800,000 rent that would be ₦360,000 off taxable income. It does not reduce the rent, but keep the receipt in the rent pot's records so you can claim it. This is information, not tax advice.
Steps
- List every cost you paid in the last 12 months that was not monthly.
- Write the next due date and expected amount beside each.
- Apply the formula and add up the monthly total.
- Set up one transfer on payday into the sinking-fund pot or pots.
- After each bill is paid, check the actual against the plan and adjust next year's figure.
Where Pryme fits
Pryme Savings Boxes let you create a separate naira Box for each sinking fund; a Fixed Box suits a cost with a firm date, and a Flexible Box suits repairs that can come at any time. Rates are shown in the app. For more on separate pots see why separate savings pots work, and for rent in particular how to save for a year’s rent.
Questions people ask
What is a sinking fund in simple terms?
Money you put aside each month for a cost you know is coming, such as rent or school fees, so the full amount is ready on the due date.
How do I calculate how much to save monthly for rent?
Take the rent, subtract what you have saved, and divide by the months until it is due. ₦1,800,000 over 12 months is ₦150,000 a month.
Should my sinking fund be in a fixed deposit?
Only if it matures before the bill is due. Otherwise use a pot you can reach on time; interest is a bonus, not the point.
Is a sinking fund the same as an emergency fund?
No. An emergency fund covers the unexpected; a sinking fund covers costs you can see coming. Keep them in separate pots.
Sources
- Kuda Help: An important update about stamp duty (modified 5 Jan 2026) · accessed Oct 2026
- BusinessDay: Why was withholding tax deducted from savings interest (21 Feb 2026) · accessed Oct 2026
- PaySpace: Nigeria tax reform 2026 – PIT bands and rent relief (19 Nov 2025) · accessed Oct 2026
This article is general information, not financial, legal or tax advice. Products described are provided under the terms on this site and are subject to regulation and eligibility.