A sinking fund is a financial tool that requires periodic parts over a given period. It is also called an amortization fund. The idea behind this savings plan is that as you make annual payments and each amount of payment worth decreases, in order to account for an investment aspect known as compound interest.
Why Do I Need a Sinking Fund?
One reason to set up a sinking fund is to build up your finances to the point that you do not need to worry about sinking fund payment. However, most of the time, you will want to set up a sinking fund because you need money now and you want it in the future. In addition, having a cushion for pinch, financial experts often recommend that people follow a sinking fund policy for investments and savings plans. Really, it is more like a strategy.
How Do I Create a Sinking Fund?
The first step is to determine the amount of money you want to put in a sinking fund account, the time frame for which you want to set up a sinking fund and the period in which you will contribute. It is also smart to consider whether your sinking fund will benefit from compound interest. Then, deposit your funds according to your goals each year. Some financial experts recommend making additional part in order to avoid having your money tied up for several years.
Benefits of Sinking Funds
Setting up a sinking fund can have numerous benefits. A sinking fund payment is one example. While you may already know that compound interest increases the money in your account over time, did you know that it also reduces the time it takes to reach your goal? This means that with a sinking fund plan, you could reach your goal faster than if you put off setting up a sinking fund until later.
How Many Sinking Funds Should I Have?
It is useful to have several sinking funds with different goals in mind. For example, if you are saving for a down payment, you should have one sinking fund account just for that purpose. Because it is a specific goal with a deadline, it is easier to stick to your plan instead of having money in multiple accounts without any specific purpose – and no deadline. In addition, having multiple sinking fund plans could help you save up more than essential for certain purposes so you can use the extra money for other purposes or pinch.
Setting up a sinking fund is a smart way to save money. And because you will have a specific goal in mind, it will be easier for you to stick with the program. In addition, because that goal could take years, it is best to have multiple sinking funds so that you do not need all of your savings right away.