What Is A Sinking Fund And How You Can Use It?

What Is A Sinking Fund And How You Can Use It?


What is a sinking fund? Is it similar to savings?


Well, a sinking fund is the total amount of money you set aside that is entirely separate from your emergency fund or savings account. Because of this, you can use the sinking fund to pay various services and purchases such as repairs and medical bills. You can also use it as a form of savings. It is a good source of funds whenever you are planning to get a new car or fly next year to your dream vacation.


Once you have received your salary or income, it is better that you set aside money right away before you sue them. In this way, you will prevent the unnecessary use of your emergency funds. Furthermore, it gives you extra leverage whenever there are tempting purchases and transactions. Actually, many businesses and financial institutions describe sinking funds as expenses planned ahead. 


In a nutshell, you can say that a sinking fund can serve as a safety net, especially to your personal income and finances. You can utilize this money to avoid debts and stay on budget. In the long run, it will give you the ability to fulfill your financial goals. 

When To Use A Sinking Fund?

There are various ways you can utilize a sinking fund. At the same time, there are numerous reasons why you should do so. For instance, if you have a planned transaction or purchase, a sinking fund can help you a lot.


There are “unessential” expenses that you a sinking fund can cover. Home repair and remodeling and vacations are among those things that this fund can shoulder for you. Even if you are not still aware of their exact price, it is still ideal that you can build a sinking fund that can cover any unprecedented expenses. Of course, the sinking fund doesn’t have to cover everything. But at the very least, it can help cover a part of the expense. 


The most prudent use of a sinking fund is still related to emergencies such as accidents and hospitalization. If your emergency fund is not enough, this one can provide another layer of protection to your finances. 


Before you set a sinking fund, it is important that you can determine the amount that you should allocate to it. It is really up to you how much you can set for it. As long as you have allocated money on it, you are already on the right path. Try to stack up that amount by the number of months before an expected purchase or transaction takes place. After that, add the amount that you can gather from the sinking fund to your monthly budget. In this way, you will be able to see if your total money can cover your monthly expenses and other non-essential expenses.


If you are building a sinking fund for medical expenses, house renovation, or car repair, you need to identify how much money you can place in the fund without knowing the cost of those allocations. Just keep on setting aside money until you will be able to establish your desired sinking fund amount. Once you have fully utilized the money in your sinking funds, just replenish them. 


Different Types Of Sinking Funds

Make sure that you put your sinking funds in liquid accounts. Specifically, the ideal option here is a high-interest money market account. Of course, you can always choose the account that you want depending on your intended use of the fund. For individuals who are currently aiming to hit big financial goals in the long run, you might need to put the money in an account that you cannot access easily, but can provide high yields. 


But at the same time, it is not recommended that you put the sinking funds in the stock market. The stock market is pretty volatile, and there’s no guarantee that the money you put there will earn big. Your goal here is to have your money gain high interests. Hence, the ideal option here is to put the money in an account that comes with high-interest rates.


If you are planning to create multiple sinking funds, you need to open separate bank accounts, too, for each of them. You can dedicate a sinking fund for car repairs and another sinking fund for emergency bills and medications. Since you might need these funds immediately (as the need arises), you need the accounts to be easily accessible). Meanwhile, you don’t need a liquid downpayment for a house since you are already aware when to pay it and how much you are going to need. In this particular sinking fund, it is completely possible that you can put it on accounts that have high-interest yields.