Understanding Sinking Funds For Better Budgeting

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.

Understanding Sinking Funds For Better Budgeting

What Is a Sinking Fund? A sinking fund is a cash reserve in your account that holds calculated funds for future expenses. There is usually a stand-alone account for each sinking fund category. This account is separate from your regular checking, savings, and emergency fund.

Your strategy should be to set aside a portion of your monthly income to let the sinking fund grow. The sinking fund you create can either be a set target amount for planned expenses or a general saving account for future expenses that are unplanned but necessary.

Sinking Fund Vs. Emergency Fund 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.

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.

Cover Planned Expenses 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. Without sinking funds, these expenses will come out of your checking account.

A sinking fund set up for unplanned but anticipated expenses helps prevent them from being an emergency. Unexpected expenses have a sneaky way of eating away at our savings. A sinking fund helps offset budget deficits.

Cover Unplanned But Anticipated Expenses

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