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.

So why not make your savings work better for you? Setting up a sinking fund is easy to do and enhances your ability to save money for large purchases you will make in the future.

What Is A Sinking Fund?

Sinking funds have long been helpful for companies and bondholders to minimize risk. For example, 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 at maturity.

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.

How To Set Up Your Sinking Fund 1. Review Your Budget

2. List Your Planned Purchases

Please make a list of sinking fund categories, break them down into more specific items. Then determine the target amounts for each. Name your sinking fund by its discreet type.

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.

3. Where Your Savings Will Go For Purchases

4. 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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