Create Your 2022 ‘Sinking Fund’
A personal sinking fund can be used to accumulate the funds or a set amount of money for a specific purchase at a set future time. For this purpose, a sinking fund allows you to accumulate funds to prevent the occurrence of debt. The “sinking” in the term “sinking fund” refers to the reduction in net obligation.
Sinking funds are different from general savings or emergency funds because of their specific purpose.
Since not all personal savings accounts are created equal, you can create a savings account (or personal sinking fund) for any big-ticket items you will purchase in the upcoming year. A sinking fund can be used to set aside money to pay off debt, to save for a planned investment, like areal estate or a major home renovation.
Essentially, a sinking fund is set up for a particular purpose. Using a sinking fund, you can allocate savings for each major expense in its own separate account. A sinking fund can be used by anyone who wants to save up for a large, planned purchase. You can begin a sinking fund for a wide variety of reasons, including:
- Vacation
- Car purchases
- Holiday expenses
- Home renovation
- Wedding expenses
- Down payment on a home
- Property taxes
“Your sinking funds are automatic savings accounts that are building for something you know you’re going to spend money on this year,” said Chris Peach, founder of Money Peach. “What will you spend on Christmas next year, what will you need for your vacation this summer, or how much will you have to save up for your sister’s wedding across the country in November? Divide the amount needed by the number of months remaining and create an automatic savings plan for when that day comes. Do this for each major expense coming up and then rinse and repeat.”
Summary
As you can see, planning and savings can go a long way in helping you manage your personal finances. A sinking fund is the perfect way to make sure you are putting away the money you need to accomplish your long-term goals and that it will still be there when you need it.
Sinking funds work best for known future expenses that don’t fit nicely into your monthly budget and help consumers avoid debt.
References: