What You Need To Know About a Sinking Fund published by  Tim Thomas

Tim thomas

We all have something special we’d like to buy for our home or in life. That old couch that has seen better days in your living room begging for a replacement or a vacation you thought about for a long time but keep pushing off because it is too costly.

Paying for these significant expenses can be challenging, but a sinking fund may pave a better way. Sinking funds can be a gamechanger for individuals and households.

What Is A Sinking Fund?

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. Many bonds now have a sinking fund managed by a trustee who oversees the fund.

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A Sinking Fund For Your Household

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. Once you determine what you want, say a new couch for $1,000-$1,500 for your living room, your sinking fund is for the sofa, not for another expense.

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. Emergencies, by definition, are unknown as to timing and amount needed. You still have to pay bills, rent, or mortgage. Unplanned events happen, upsetting your finances.

How To Set Up Your Sinking Fund

Before setting up your sinking fund, you should have a good grasp of your household’s budget. Budgeting is an essential tool for understanding your income sources less fixed and discretionary expense categories. Fixed living costs include your rent or mortgage, utilities, loan payments, and savings. It would help if you had “savings” on your budget for paying yourself first.

1. Review Your Budget

How To Set Up Your Sinking Fund

Please make a list of sinking fund categories, 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.

2. List Your Planned Purchases

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