Sinking Funds

by Miriam Caldwell | More from this Blogger

16 Sep 2006 09:03 PM

Many experts recommend having a sinking fund. A sinking fund is basically savings that you have set aside to cover a specific upcoming expense. This is one easy way to avoid debt. A sinking fund can be used for a variety of expenses.

You may have a sinking fund for repairs and upkeep for your home. If you are planning on eventually remodeling the kitchen, you may want to start setting aside money for that now. If you know you will need a new roof in the next five years, you can begin saving for these now.

Another common sinking fund is for automobile repairs. This is essential if you drive an older car, because the repairs can add up quickly. Often it is less expensive to fix an older car than it is to buy a new one. If you are planning on buying a new car, you may want to use a sinking fund to save up for the purchase of the new vehicle.

Once you have determined the categories for your sinking fund, you need to determine the amounts you feel necessary. Usually this is the most expensive repair that you will have to make. By planning for these expenses you will avoid using your emergency fund, or going into debt to cover these items.

You should keep the money for your sinking fund in a fairly liquid account. You will want to be able to access it, if an emergency arises. A high yield savings account or a money market account will work well. You do not need to open a separate account for each sinking fund, but you should keep track of how much you have in each account. You can do this in a spreadsheet or on paper if you are more comfortable that way.

Learn more about Miriam Caldwell

Miriam is a SAHM mom of three children. She has a daughter who is seven, and two sons, four and two. She loves being a parent and spending time with her children.

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