What You Need To Know About a Sinking Fund

Sinking funds can be a gamechanger for individuals and households. It is a valuable tool to add to your financial toolbox for savings. This strategy helps those who want to manage their finances better and gain peace of mind.

What Is A Sinking Fund?

Sinking funds have long been helpful for companies and bondholders to minimize risk.

when corporations need to raise capital, they may issue a bond that matures in 20 or 30 years.  Bondholders receive coupons semiannually and the principal (their investment) at maturity. Many bonds now have a sinking fund managed by a trustee who oversees the fund.

A Sinking Fund For Your Household

Similarly, you or someone in your family can create a sinking fund, dedicating a savings account for a specific household expense that may be too large to handle without borrowing the money.

There is a greater temptation to pull out your credit cards for these large purchases without a fund. Your challenge is that you would have to pay your card balance in full or face a card balance growing on a compound basis at high-interest rates.

Sinking Fund Vs. Emergency Fund

Both your sinking fund and emergency fund are safety nets but for different purposes. An emergency fund is for the money you set aside in a savings account for unexpected costs you may face when losing a job, boiler breaks, a medical necessity, or pet surgery.

Emergencies, by definition, are unknown as to timing and amount needed.  You still have to pay bills, rent, or mortgage. Unplanned events happen, upsetting your finances. We recommend having your emergency fund cover six months of your basic living needs. You want to have access to liquid assets quickly.

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