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What is a Sinking Fund?

Setting aside money for a specific and upcoming expense.

Yes, the term “sinking fund” certainly sounds misleading. One may hear the term and immediately think it has a negative association. Luckily, that’s not the case! Sinking funds are actually a great addition to everybody’s budgeting plan.

Here is your quick start guide to the world of sinking funds, what they are, and so much more.  

What is a sinking fund?

A sinking fund is simply defined as money set aside or budgeted for a future expense. Unlike a savings account or emergency fund, a sinking fund has a singular purpose. You can create a sinking fund for numerous future expenses such as a family vacation, home renovation projects, wedding expenses, or back to school supplies. Essentially, you can create a sinking fund for any future financial goal you have.

Difference between a sinking fund and a savings account.

When it comes to sinking funds, it’s all about intention. Do you plan on going on a cruise in 12 months? Do you plan on having your dream wedding in two years? Knowing where your money is going in the future implies intention. A savings account, on the other hand, is a lump sum of money saved over time that doesn’t have a designated intention for the future.

Difference between a sinking fund and an emergency fund.

The biggest difference is that an emergency fund is money set aside for the unknown. No one knows what the future holds – that’s why it’s so important to plan and save for those unexpected expenses.

How to set up a sinking fund.

Here are some questions you’ll want to ask yourself before setting up your sinking fund:

  • What are you saving up for?
  • Where are you going to store your sinking fund? Is this in a different savings account altogether? Is this in a money market account?
  • How much do you need to save? It’s also helpful to determine how often you will be contributing to the fund – monthly, weekly, per pay period?
  • Determine if and how the sinking fund can fit into your overall budget.

Don’t let saving for a large expense give you a sinking feeling. Sinking funds are a great way for you to strategically and intentionally save for those exciting upcoming expenses.

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