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Traditionally, businesses have used a “sinking fund” to set aside money on a regular basis in order to retire a bond or repay a debt. Using a sinking fund will reduce the amount that the company must pay out of pocket when the loan matures. However, the same method may be used to save money and avoid utilising credit cards or an emergency fund for unexpected expenses or large expenditures. Companies aren’t the only ones that may benefit from sinking money; people can do the same.
In any case, what is the definition of a “sinking fund”?
The term “sinking fund” refers to a savings account set up specifically to cover a future expense. It’s not the same as a regular savings account or an emergency savings account, which may help you put money aside for things like replacing a broken water heater. Calculating how much money will be needed to cover an impending purchase and setting aside a certain amount of money each month may be thought of as creating a sinking fund.
Real-world use of a sinking fund example
Let’s say you’re planning on spending around $1,200 on a vacation sometime next year. A sinking fund may be used as an alternative to paying for large, unexpected bills using savings or utilising credit cards to finance a trip. Every month, you’ll put $100 more into the sinking fund. You won’t have to worry too much about your budget if you save up $1,200 by the end of the year to cover the cost of your vacation.
There are a number of different sinking fund account types.
You need to decide what sort of account to set up for the money if you think employing a sinking fund could be a successful technique. The following are some types of savings accounts that might be used as sinking funds.
Account with a checking feature
Free checking account funds are an attractive option for sinking funds. Having a checking account ensures that you can access your funds whenever you need them. A second checking account might be useful if you intend to make a single large purchase in the near future and wish to save money in a separate location. Find a checking account with a higher interest rate if you want to get the most out of your savings.
Commonplace savings accounts
A regular savings account might also serve as a sinking fund. A new savings account may be opened with the same financial institution as an existing one, making it easy to transfer funds between both. But regular savings accounts don’t often provide great interest rates, so if you want to earn money on your savings, this may not be the best option.