What Is A Sinking Fund? All You Need To Know

FUNDS

We all have something special we want to buy for our home or life. That old couch that has seen better days in your living room begging for a replacement or a vacation you have thought about for a long time but keep pushing off because it is too costly. Paying these significant expenses can be challenging, but a sinking fund may pave the way for a better solution.

Sinking funds can be a game-changer 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.

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?

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. We will explain later how your sinking fund differs from your emergency fund.

A Sinking Fund For Your Household

Your sinking and emergency funds 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

Before setting up your sinking fund, you should understand your household’s budget well. Budgeting is essential for understanding your income sources, less fixed and discretionary expense categories.

Review Your Budget

Please list fund categories and break them down into more specific items. Then, determine the target amounts for each. Name your sinking fund by its discreet type. Some funds may have higher amounts and longer timeframes.

List Your Planned Purchases

You can open an FDIC-insured savings account for each type or have one large sinking fund with named sub-accounts.

Where Your Savings Will Go For Purchases

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Why You Need An Emergency Savings Fund (And How To Create It)