A sinking fund is maybe what you need for your next purchase

None of us is new to the concept of setting aside a bit of money each month or each week to buy something that we have been wanting for a long time, and this is how most people save – but what if we told you that there is a term for this? Yes, you read that right. The concept of “sinking” money each month for a specific purpose is termed a sinking fund, and is recommended as an extremely appropriate and ideal saving strategy.

What exactly are sinking funds?

Simply put, sinking funds are those funds which are set aside for a specific purpose – hence the name, sinking. Typically, they are used to repay debts and are a term that is used in finance often. However, sinking funds can also be extremely pertinent and useful for individuals and others who want to ensure that their savings improve their quality of life, and give better purchasing power.

What are the advantages of such funds?

One of the biggest advantages of such a fund is that you do not have to come up with the entire amount all at once, especially in the event that you are seeking to make a big purchase.

Imagine this. You have seen the most beautiful car in a showroom, your ideal model and colour, but realise that you do not have the funds to purchase it outright. This is where sinking funds come into play. Without having to part with a chunk of your money at that very moment, you can allocate a portion of your savings each month instead to go towards your car payment. Before you know it, and without compromising on your monthly budget otherwise, you suddenly realise that you have the ability to afford the new car!

Best way to approach such a saving strategy

As with every other budget and saving strategy, it is important to remember that the strategy has to be modified and fine-tuned to your individual needs. There is no “one size fits all” concept when it comes to saving strategies. However, The best way to have an adequate amount of sinking funds could be in the following manner:

  • Remember to set aside a portion of your income every month, even if you do not have a tangible goal for using such amounts.
  • Ensure that you do not go under the limit that you have set for yourself, with respect to such funds.
  • Ensure that your savings fund and safety funds are separate from this – this is mostly to ensure adequate cash flow for the purchases you want to make.
  • Identify potential areas where you may wish to use the money that you have saved.
  • Set limits within your budget.

It is obvious that there may be budgets and households with multiple purposes for the fund which have been maintained. In such scenarios, it may prove to be helpful to identify on the basis of priority, as to which purpose such money must be used for. Hence, sinking funds can often be an extremely helpful form of budgetary tool.