What You Need To Know About a Sinking Fund

Sinking funds can be a gamechanger for individuals and households. It is a valuable tool to add to your financial toolbox for savings. This strategy helps those who want to manage their finances better and gain peace of mind.

What You Need To Know About a Sinking Fund

Sinking funds have long been helpful for companies and bondholders to minimize risk. For example, when corporations need to raise capital, they may issue a bond that matures in 20 or 30 years. Bondholders receive coupons semiannually and the principal (their investment) at maturity.

What Is A Sinking Fund?

A Sinking Fund For Your Household

Similarly, you or someone in your family can create a sinking fund, dedicating a savings account for a specific household expense that may be too large to handle without borrowing the money.

Both your sinking fund and emergency fund are safety nets but for different purposes. An emergency fund is for the money you set aside in a savings account for unexpected costs you may face when losing a job, boiler breaks, a medical necessity, or pet surgery.

Sinking Fund Vs. Emergency Fund

The sinking fund is for saving money for a known purpose you expect to purchase in the future. Typically, your sinking fund is for a specific planned amount. 

Review Your Budget Before setting up your sinking fund, you should have a good grasp of your household’s budget. Budgeting is an essential tool for understanding your income sources less fixed and discretionary expense categories.

How To Set Up Your Sinking Fund

Name your sinking fund by its discreet type. Some funds may have higher amounts and longer timeframes. Divide each type total by the numbers from the planned purchase time.

 List Your Planned Purchases

Keep in mind that the sinking funds are separate from your emergency fund and savings accounts. The type of accounts you should look for should be readily accessible and liquid, similar to the account you use for an emergency fund.

Where Your Savings Will Go For Purchases

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