As demonstrated by most events in life, you need to have a plan to make any big dream possible. Availability of funds plays a massive role in most projects to be executed, and here is where sinking funds come to play. We shall look at the ins and outs of sinking funds and everything you need to know about them.
What is a sinking fund?
This is the sum of money a person sets aside when they want to get a big ticket item. It defers from a savings account or emergency fund because the value and use of the money are defined.
What are the benefits of a sinking fund?
Having a few items of desire that are not necessarily within your monthly budget can be great motivation to work harder. The merits of a sinking fund are;
- You have less financial strain because the money will be used on significant expenses outside the regular monthly expenditure.
- You are less stressed and guilty because of making a large purchase
- The fund enables you to save for items that cost a lot of money but will be necessary for the future, like tires for your car.
- A sinking fund is a financially sound way to reward yourself with luxury items and vacations without wreaking havoc on the necessities budget.
What are the 3 main steps of setting up a sinking fund?
The most critical aspects of starting and maintaining your sinking fund are as follows;
1. The Goal
The first and most vital part of the sinking fund is to define the goal of the money you will set aside. With this, you need to be as specific as you can get and, in some cases, have the exact model of the item you want. For instance, if the fund is meant to purchase a car, the model and accessories you want should be noted. The specifics apply to a house, gifts, boats, and vacations.
2. The Amount
After you determine the item you want to get, you need to get an estimate of how much it will cost by the time you reach the financial goal. It is best not to set the exact amount by a calculated estimate above the actual price to cover any eventualities. Alternatively, you can check any price changes for the item in question and adjust the contributions accordingly.
It would be best if you also determined the frequency of the contributions that work for your budget. When setting up a sinking fund, it is wise to ensure it does not work against your needs and essentials. It is better to reduce the amount you can contribute and increase the timeline needed to get the desired item.
3. Account Options
When the amount and goal are defined, the final essential step is determining where you will keep the money. A sinking fund account should not require a minimum maintenance balance because the amount will eventually become significant when you finally withdraw the funds.
Choosing an account that is not easily accessible to you is crucial to reduce any temptations to withdraw the money. Some apps can help you easily plan out your sinking fund in a convenient and stress-free way.
You can have different accounts for different items, and setting up a sinking fund is an organized way of achieving success. It is even easier when you follow the three steps listed above.