What are sinking funds?? I came across the term briefly somewhere but I really don’t know what it’s about
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What are sinking funds?? I came across the term briefly somewhere but I really don’t know what it’s about
My definition of a sinking fund is simply a category of your budget that you place money into in anticipation of reducing debt, or more traditionally preparing to take some activity in the future which will require funding when the time comes; such as, new roof, painting a house, replacing equipment or vehicles. Place this money in an account that will earn money with a high degree of safety until it is needed.
Any irregular expense that you wouldn’t be able to easily cover with your free cash flow is a good candidate for a sinking fund. Sinking funds work like this: every month, you’ll save money across multiple categories to be used at a later date. The funds accumulate, sometimes in an interest bearing account and drawn only for the intended purpose. This helps you avoid situaitons where you do not have the money to replace something and must rely on consumer loans with their high interest to be able to pay for it.