If you have a known future expense, how do you go about paying for it? Do you take out a loan to cover the cost or do you take money from savings to pay for it? Sinking funds are a great tool for paying for future expenses. So what exactly are sinking funds?
Sinking funds are money that you set aside for a specific purpose (paying for education, purchasing a car, paying for a wedding, paying for a vacation, saving for a house down payment, etc.). The money is only to be used for the purpose that you have defined. Hence, you should not be taking money from the sinking fund to pay for something else.
Sinking funds help to alleviate any unnecessary stress, as when it is time to pay for the expense, you have the money already available. I personally have used a sinking fund when I was pursuing my graduate degree. I had started to save money one year prior to starting my graduate program, and as a result, I was able to pay cash for my Master’s Degree and all school related expenses, without taking out any loans. This enabled me to focus solely on my studies, instead of worrying about how I would pay for my education.
Contrary to its name, sinking funds help you to avoid “sinking in financial struggles.” It makes it possible for you to brace your expenses with confidence, as you have the money already saved to tackle your costs. Depending on how long you have your sinking fund, you should have enough money saved to either cover all of your expenses, or to cover majority of the expenses.
So how do you start a sinking fund? You can open a savings account and dedicate it solely for the purpose of your sinking fund. Also, if you have multiple goals that you are trying to accomplish, it is completely acceptable to open more than one savings account, that way you can keep track of how much you have saved for each of your goals. If you do not wish to open a savings account, you can use a savings jar, or keep an envelope which is labeled with the purpose of the fund. If your goal requires that you save a large amount of money, then I would recommend that you use a savings account, instead of the savings jar or envelope, for safekeeping purposes.
If you don’t already have a sinking fund for a goal that you have, then what’s stopping you? It’s time to plan in advance and start setting aside funds to pay for your goals, instead of having them sneak up on you.
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