The Art of Sinking Funds

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Sinking funds is a not a new term in the field of business and more so the government. As a matter of fact, they have been using this for quite a long time. I know for one, that we are not business entities and more so the government. However, we must really consider adapting sinking funds.

For individuals who might encounter this term for the first time, it might sound scary. It seems that you are putting money and in the end it will sink and vanish. Oh your money, your funds. Can you even afford sinking all of that money? Now that’s not true. Let us lift the fear from you.

In order to better understand what a sinking fund is, a definition would be appropriate. According to Investing Answers, “a sinking fund is a part of a bond indenture or preferred stock charter that requires the issuer to regularly set money aside in a separate custodial account for the exclusive purpose of redeeming the bonds or shares.”

But wait, the definition is geared towards bonds or preferred stocks. How can we link this to our lives?

We simply redefine the statement above in order to put sinking funds to better use. Simply put, sinking funds are money reserves that we set aside for a future purpose.

We simply commit therefore to be able to put our finances in order to anticipate future expenses that would require a huge amount of money.

We need to know therefore what our irregular expenses that can just come and go. With that anticipation, we can be able to plan out as early as now so that by the time comes, it will not hurt our wallet and more so our banks. It would make sense therefore to set a small portion of our budget towards that irregular expense. And that is what we refer to as sinking funds.

So what are some examples of irregular expenses? We have Christmas, New Year, birthdays, graduation, Fiesta and more.

To further appreciate what a sinking fund is, here’s a timely example.

Christmas is just around the corner. We are just counting the days until the holidays are upon us. We know for a fact that we will be spending much during the holidays because of the numerous parties and the gifts we give to our family and loved ones. Without a sinking fund, you might be tempted to use your credit card or worst use your Christmas Bonus and 13th month pay in order to cater the varied expenses demand. And you know very well from the start of the year that you are going to spend on December.

If you have a sinking fund, you won’t need to use your bonus and 13th month pay at all. The reason being is that you already saved a substantial amount from the very beginning to cover the irregular expense. For instance, you might need 20,000 for the Christmas holiday for gifts and food. If you start saving as early as January for this future expense you have 11 months to save up. You are paid twice a month. Multiply 11 by 2. Hence, divide 20,000 by 22. Hence every pay day, you would be setting aside 909 pesos. That is not a huge amount compared to getting the entire 20,000 on December. Even more, you can set aside your Christmas Bonus and 13th month pay to more profitable ventures.

The concept of sinking funds is relatively easy. Plus, it takes no rocket science to understand it. You only need to know what those future expenses are and start saving for it as early as today. Plus, this not only holds true to celebrations. Even a once in a lifetime event like weddings can make use of a sinking fund.

Since we still have two months before the holidays, it would be wise to start your own sinking fund for it.

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