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.

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.

The purpose of a sinking fund is to have enough liquid cash savings to cover anticipated expenses. Here are some reasons you need to set up a sinking fund.

What Is the Purpose of a Sinking Fund?

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.

Medical bills, home, auto repair, and maintenance are some anticipated but unplanned expenses. While you can't determine an exact budget for these things, planning for them is necessary.

Cover Unplanned But Anticipated Expenses

Protect Emergency Fund

We set up emergency funds hoping we never have to use them. A rainy day fund takes care of life's unexpected events. You'd never expect to lose your job, yet, it is not uncommon.

Setting up a sinking fund is a sound financial decision. It is a way of forward-thinking about financial responsibilities. By having a sinking fund in place, you're saving up money for the items you (may) need in the future.

Promote a Good Budgeting Habit

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