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.

The sinking fund is for saving money for a known purpose you expect to purchase in the future. Typically, your sinking fund is for a specific planned amount. You know its timing and have been saving for it. The point of having a sinking fund is not to tap your emergency money or a general savings account. 

Here's how to set up your sinking fund

Review Your Budget

Before setting up your sinking fund, you should a good grasp of your household's budget. Budgeting is an essential tool for understanding your income sources less fixed and discretionary expense categories. 

List Your Planned Purchase

Please make a list of sinking fund categories, break them down into more specific items. Name your sinking fund by its discreet type. Some funds may have higher amounts and longer timeframes. Divide each type total by the numbers from the planned purchase time. 

Where Your Savings Will Go For Purchase

You can open an FDIC-insured saving account for each type or have one large sinking fund named sub-accounts. Keep in mind that the sinking funds are separate from your emergency fund and savings accounts. The type of accounts you should look for should be readily accessible and liquid, similar to the account you use for an emergency fund. 

Need FDIC-insured Account

Whatever you decide to do, each sinking fund should be in an FDIC-insured savings account that is readily accessible. Then, for longer-term purchases, look for higher yields and minimize fees you may have to pay. 

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