Sometimes emergencies that require cash pop into our lives. It’s hard to plan for these types of events and they often take us by surprise.
But what about those events or occasions we know are coming? Do you have payments for school, your friend’s birthday, car payments, or even Christmas coming up?
Setting up a sinking fund is an easy and financially responsible way to prepare for these events.
What is a sinking fund?
The simplest definition of a sinking fund is an amount of cash formed by periodically setting money aside. These funds are used to either pay off a debt or to purchase a specific item.
When large organizations utilize sinking funds it is typically through the repayment of bonds. However, when individuals decide to begin a sinking fund, it can be through whatever method they deem best.
Where do I keep my sinking fund?
One purpose of sinking funds is to have the cash easily accessible, but if you’re accumulating a large amount, then you want it to be safe. Stowing away a couple of bucks in an envelope is perfectly fine if you’re saving up for something smaller. But if your goal is to purchase a new car with your sinking fund, then you may want to store your money in a more secure location such as a bank.
What is the difference between a sinking fund and a savings account?
Generally, the money in sinking funds is meant for a specific purpose. Also, the way in which these funds are saved and store is up to the savers discretion. On the other hand, while savings accounts can have specific purposes in mind, they can also be set-up for general purposes.
The second difference is that savings accounts are typically set up through the savers bank. This means that if a saver forgets to make a payment into his or her savings account, then the bank can charge them a fee.
Where can I learn more about sinking funds?
If you’re interested in learning more about the simple type of sinking funds, then click here to watch a helpful video, or read this instructional article by Dave Ramsey. Or, if you’re wanting to dive into the more complicated world of sinking funds organizations are known to use, then click here to read this informative article.
Either way, a sinking fund is a great way to payoff a debt or to save up money for events that you know will pop up soon.