What You Need To Know About A Sinking Fund

What Is A Sinking Fund? Sinking funds have long been helpful for companies and bondholders to minimize risk.

Many bonds now have a sinking fund managed by a trustee who oversees the fund. Money is set aside periodically with a trustee for repayment of the portion of the principal.

Sinking Fund Vs. Emergency Fund 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.

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.

How To Set Up Your Sinking Fund 1. Review Your Budget Before setting up your sinking fund, you should a good grasp of your household’s budget.

2. List Your Planned Purchases Make a list of fund categories, break them down into more specific items. Then determine the target amounts for each. Name your sinking fund by its discreet type.

3. Where Your Savings Will Go For Purchases You can open an FDIC-insured saving account for each type or have one large sinking fund with named sub-accounts.

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