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What is a Sinking Fund?

People raise a sinking fund, businesses, and economic institutions by consistently putting in money at designated time periods to eventually be used for a considerable, semi-random expense. Typical expenses include car or home repair, remodeling, or a trip to the orthodontist or ophthalmologist.

People also use these funds for vacation, school tuition, and taxes. Realistically, these funds can be used for anything as long as you budget accordingly.

Communities and local governments use this funding option to raise collective funds to redistribute to needy people. Businesses use this option to pay off debts, corporate bond agreements – also known as indentures, and refinance future loans.

A Sinking Fund is Not a Rainy-Day Fund

These two fund types are very similar because both options are used when people want to put money aside for future expenses. However, rainy-day funds are raised by individuals and families, usually for emergency purposes, not for a direct reason or an unexpected expense.

Both funds also aren’t the same as a nest egg or savings account, although all options involve stockpiling money for future expenses and can be used similarly. Savings accounts should build over time with no or limited withdrawals.

It also is not the same as an emergency fund, which typically doesn’t have consistent deposits. Emergency funds are also typically a final safety net for unavoidable or drastic expenses, such as dealing with an accident, family emergency, or other time-pertinent expenses.

How to set up and budget for (keyword or this savings option)?

Start by creating a separate savings or checking account at your local bank. You do not need to create a specialty account to set this up; just treat the checking or savings fund like it is unique.

This isn’t an emergency or squirrel fund, so you shouldn’t put your money in cash at the risk of it being stolen or used for something else. The point of this savings option is that it will be used solely for one thing; it isn’t meant to be invested or spent on a bunch of small purchases.

Next, decide what you are raising the money for and how much you need to save. Most people save between $500 and $5,000, but businesses and local communities may want to save more. Set a time goal for how much you want to raise, and accordingly budget out how much you need to put in monthly.

You don’t want to scramble to find the money for a car repair, but you also don’t want to feel burdened monthly to raise additional funds. All this depends on how much you need to raise and how quickly you need to spend the money you raise. However, try to put in at least 5% of your monthly income for every deposit.

Don’t Wait. Start an Account Now.

Sinking funds are perfect for families looking to save a few extra dollars for school expenses, future vacations, or home repairs. Budgeting is the same as any other fund, so you should be fine raising the money as long as you stay committed to your goal. Treat your savings account as sacrosanct, and you can pay for any semi-random expense with no hassle.

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