Knowing Sinking Funds Can Help You Budget More Effectively

It's challenging to cover a significant expense in a short duration. Some people go into debt over it.

A well-established sinking fund helps shield life's unexpected events, protects your financial goals, and promotes better budgeting.

What Is a Sinking Fund?

A sinking fund is a cash reserve in your account that holds calculated funds for future expenses.

A sinking fund might sound like an emergency fund, but it is not. They have two separate structures. An emergency fund is a general fund, whereas a sinking fund is specific to the expense category.

Sinking Fund Vs. Emergency Fund

What Is the Purpose of a Sinking Fund?

The purpose of a sinking fund is to have enough liquid cash savings to cover anticipated expenses. A sinking fund supports costs related to life events and assets.

The planned expense could be something as small as a gift purchase or Christmas costs or as big as a family vacation and furniture purchase.

1. Cover Planned Expense

2. Cover Unplanned But Anticipated Expense

A sinking fund set up for unplanned but anticipated expenses helps prevent them from being an emergency.

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