Why People Underestimate Future Expenses

When people set up sinking funds, they estimate what each future expense will cost. And almost universally, those estimates are too low. The car service costs more than expected. The insurance renewal is higher than last year. Christmas ends up more expensive than planned. The fund runs short, and the gap has to be covered from somewhere else.

This isn't carelessness. It's a predictable pattern with identifiable causes — and it's easy to correct once you understand why it happens.

Optimism Bias

People naturally estimate future costs based on best-case scenarios. The car service will be routine. The insurance renewal won't increase much. Christmas will be simpler this year. This optimism bias is well-documented in psychology — we consistently expect the future to be better than the past suggests it will be.

In financial planning, optimism bias means estimates are systematically too low. The fix is to deliberately adjust estimates upward — not to be pessimistic, but to counteract a known bias.

Using Outdated Figures

People often estimate future costs based on what they paid last time — which may have been one or two years ago. Prices increase. A car service that cost €280 two years ago may cost €340 today. An insurance renewal that was €600 last year may be €680 this year. Using outdated figures produces estimates that are too low before the fund even starts building.

Always use the most recent cost as your baseline, then add a buffer for price increases.

Forgetting Associated Costs

People estimate the main cost of an expense but forget the associated costs. A holiday estimate covers flights and accommodation but forgets travel insurance, airport transfers, spending money, and the cost of getting to the airport. A Christmas estimate covers gifts but forgets food, decorations, and travel. The main cost is right; the total cost is significantly higher.

When estimating, think through the full experience of the expense — everything it will cost from start to finish, not just the headline figure.

The Buffer Rule

The simplest correction for all of these biases is a consistent buffer: add 15% to every estimate. If you think the car service will cost €300, save for €345. If Christmas looks like €800, save for €920. Any money left in the fund after the expense rolls over to the next cycle — which means next time you need slightly less per month.

The Sinking Funds Tracker from VARDENCIA makes it easy to adjust targets and recalculate contributions when estimates change. For the full system, how much to put into sinking funds covers the calculation approach in detail. And the biggest sinking fund mistakes covers the other common errors that leave funds short.

Underestimating future expenses is predictable. Add a buffer, use current figures, and account for associated costs — and the fund will be there when you need it.