Sinking Funds: Why You Need Them

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It is inevitable that you will eventually run into something that will cost a bit of money that was not previously budgeted for. Life happens and things can get costly. Imagine this, you come home from work to discover your refrigerator broke. Not only did you lose all of your food but after calling a repair man, your fridge is dubbed as irreparable. So now you are have to purchase a new refrigerator. A sinking fund would be ideal in a situation like this.

You might be wondering what a sinking fund is. A sinking fund is also sometimes referred to as an emergency fund. When unexpected expenses arise you need to get money from somewhere. It is best to keep this as easily accessible and it should be built up enough to cover some potentially costly repairs.

Sinking funds are typically used for car repairs that pop up out of no where, unexpected medical expenses, emergency home repairs or purchases that must be made or last minute emergency travel plans that have to be booked. It is obviously best not to always turn to your credit card as a way to bail you out of these emergency financial situations. A sinking fund may not be established over night, but over the course of many paychecks, one can easily be achieved.

The easiest way for setting up a sinking fund is to create a private savings account for it at your bank. You may be able to have a set dollar amount automatically taken from each paycheck direct deposit and moved into the sinking fund. If you never see this money and you never figure it into your budget, it will never be missed but will be highly useful when it is needed.

Great ways to add to the sinking fund would be to add any extra money you acquire into the fund. If you get a large bonus, more back on taxes then expected or a pay raise, you could reallocate that extra money into the sinking fund. Setting up a sinking fund does not have to be a stressful process and it should not cause any additional financial hardships to you. You may find yourself only able to donate twenty dollars a paycheck or you may find yourself financially stable enough to donate a couple hundred dollars. The point of setting up the sinking fund is to simply move some money over to a separate account that can late relieve any financial burdens you may face.