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Sinking Funds

09/15/2023 03:12 PM By Sandra Park

Why you should have sinking funds

The Power of Sinking Funds: Save Smartly for Future Expenses

In the world of personal finance, the phrase "sinking fund" might not sound too appealing. The word "sinking" generally isn’t associated with positive connotations, after all. However, when we delve deeper into the concept, sinking funds emerge as one of the most pragmatic and financially sound strategies you can adopt.

What is a Sinking Fund?

At its core, a sinking fund is a savings method designated for anticipated, planned expenses in the future. It’s about setting aside a specific amount systematically over a certain period until you achieve the required sum. And it's worth noting: sinking funds are not for those unpredictable or whimsical expenses – that's the role of an emergency fund.

For instance, consider saving for a significant surgery, preparing for festive spending during Christmas, or that much-anticipated vacation. All these are candidates for a sinking fund. The key elements to determine? Your monetary goal and the timeline to achieve it.

Breaking it Down 

Imagine wanting to embark on a $4,800 vacation in two years. Instead of scrambling to secure this sum all at once, you could simply divide the amount over 24 months. This results in a manageable $200 per month. By adopting this approach, you circumvent the pitfalls of falling into debt by swiping credit cards for expenses you didn’t save for.

Embracing the discipline of delayed gratification, combined with systematic saving, not only spares you from debt-induced stress but also the continual drain of compounding interest.

Making the Most of Sinking Funds

A top tip? Integrate your sinking fund contributions into your monthly budget. Better yet, automate these transfers to a separate savings account. Online savings accounts, which encourage contribution but limit withdrawals, are ideal for this purpose.

Depending on your preferences, you could either have a singular savings account with various earmarked "buckets" for different sinking funds or maintain multiple accounts, each labeled with its specific savings objective.

Wondering where to begin? Here are some worthy sinking fund ideas:

- Home escrow account

- Insurance premiums

- Festive season or Christmas expenses

- A brand-new car

- Planned medical or dental procedures

- Dream vacations

- Home refurbishments

- Celebrations or family gatherings

- Startup capital for a new business venture

 The possibilities are nearly endless, only bounded by your aspirations.

 Harness the power of sinking funds, and you pave the way for financial security and peace of mind. With clear goals, discipline, and regular contributions, you can bid farewell to the shackles of debt, ensuring you're financially prepared for future adventures and necessities.

Sandra Park

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