One possible mental picture conjured up by the term “sinking fund” is that of a pirate ship sinking with a treasure chest full of cash. We’re not going there right now.
True enough, sinking funds are a great addition to any comprehensive financial strategy. While functionally similar to a savings account, a sinking fund has an entirely distinct purpose and modus operandi.
Money set aside for a particular purpose, such as a future purchase, is called a “sinking fund.” As opposed to a general savings account or an unexpected expense fund, the purpose of a sinking fund is defined beforehand. It might be a vacation, a down payment on a house, or a lavish treat that motivates you to save up for this exact amount. Financial expert Haley Sacks has set up a special savings account for astrologers alone.
You may avoid some of the anxiety that comes with saving up for a large expense by establishing a sinking fund now.
First, we’ll define a sinking fund, explain how it works, and talk about what variables should be considered when deciding whether it should be a budgeted expense.
But, What, Precisely, Is A “Sinking Fund?”
A sinking fund is an account specifically set up to save money for a future expense that may be quickly accessed in the event of an emergency. Sinking funds may be used for almost anything, but it’s good to have an idea of how much you’ll need and when you need it by. With this knowledge, you may plan your spending more efficiently until you reach your objective.
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There are many more, but these will get you started. It’s true that a sinking fund may be used to cover a broad range of expenses.
Expert Advice
The best way to put sinking funds to use is to save up for a known but unanticipated expense, budget for its eventual payment, and include that sum into your total financial plan. They have no connection to your regular savings or emergency fund at all.
Both a savings account and a sinking fund are good options, but which one is more advantageous?
The goals you want to accomplish while saving money will determine whether a regular savings account or a sinking fund is the better option.
In order to save up for future expenses and goals, you may open a savings account with a financial institution.
Do not put funds earmarked for long-term goals that do not have a hard deadline into the same pot as funds for immediate expenses.
Due to the blurriness of the lines, it’s not a good idea to utilise the same bank account for things like paying insurance premiums and saving for early repayment of student loans.
It’s smart to maintain a wall between your different financial goals. This will help you save your savings for their intended purpose rather than wasting them on anything else.
To What Extent Should One Maintain a Sinking Fund vs. an Emergency Fund?
To be prepared for the most catastrophic of financial events, such a loss of income or a large, unexpected cost, it is wise to set aside an amount of money in an emergency fund. You can do nothing to alter the eventual occurrence of this event. The difference between an emergency fund and a sinking fund lies in the predictability of the former and the unpredictability of the latter.