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Historically, companies have used sinking funds to regularly put aside funds to pay off debt or retire bonds. The company’s out-of-pocket expense when the loan expires will be less if it creates a sinking fund. To conserve money and prevent using credit cards or an emergency fund for unforeseen costs or big purchases, the same strategy may be used. Not only may companies profit by sinking money, but individuals can as well.
But just what is a “sinking fund,” indeed?
An individual who sets aside money particularly for an anticipated future need is called to have a “sinking fund.” It differs from setting money aside in an emergency savings account or regular savings account for those moments when you may require a large quantity of money rapidly, such in the event of a water heater breakdown. A “sinking fund” is a place where you may start saving for a large purchase by putting away a tiny portion of your income each month until you have enough saved to cover the purchase.
Application of sinking fund example in real life
Assume for the moment that you want to spend around $1,200 on a trip somewhere in the next year. If you have an unexpected expense, it’s better to have a sinking fund than to use emergency money or charge a trip on your credit card. You will contribute an additional $100 to the sinking fund each month. If you can save up $1,200 by the end of the year to pay for your trip, then you won’t have to worry too much about your spending.
Different Types of Sinking Fund Accounts
The first thing to do if you believe a sinking fund is a viable plan is to decide where to place the money. Here are a few illustrations of possible savings accounts that might sink funds.
A bank account
An alluring way to sink money is with free checking account dollars. You can access your money anytime you need it if you maintain it in a checking account. Consider opening a second checking account, if you don’t already have one, to set aside funds for a big, impending purchase. To maximise your savings, look for a checking account that offers a higher interest rate.
Conclusion
You might also use an ordinary savings account as a sinking fund. It is possible to create a new savings account and an existing one with the same financial institution, facilitating simple money transfers between the two. Look elsewhere if you want to maximise your investment. Standard savings accounts don’t usually provide very high interest rates.
