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.
So why not make your savings work better for you? Setting up a sinking fund is easy to do and enhances your ability to save money for large purchases you will make in the future.
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.
Money is set aside periodically with a trustee for repayment of the portion of the principal. This action eliminates the need for a significant cash outlay for the company at maturity.