Since mankind has existed people have been saving money in order to purchase items which are outside the immediate scope of their disposable incomes. This can be achieved in many ways, including by making a small portion of the budget to address any needs arising out of expenses which cannot be plugged into the budget itself. Some examples of such expenses may be birthday party expenses for children, technology or car spare parts, appliances and other household articles, etc. However, it is very difficult to determine when such expenses may occur, and equally, be difficult to budget suddenly for such expenses. It is for this reason that sinking funds play a big and important role in modern budgets.
What is a sinking fund and how do I factor it into my budget?
Sinking funds basically refer to the concept of putting aside a certain amount of money from your income every month or every week, based on your needs, in order to ensure that the purchases that you want to make are able to be made. An advantage of such a system is that there is always money to fall back on in case there are any expenses which are not factored into your budget.
However, it is a common misconception that sinking funds do not need to be factored into the budget. While it is quite possible that one may not be able to specifically demarcate as to where such sinking funds may be used, it is important to make a mention of the amount that you are setting aside for the sinking fund in your budget too.
For instance, if you decide to set aside 0.5 per cent of your monthly income as a sinking budget, it is important to factor this amount into your monthly budget.
What can I use this fund for?
The advantage of a sinking fund is that you can use it for any expense that occurs in your ordinary course of life. Given that the money has already been set aside, as and when an expense occurs, you can utilise the amount that you have saved as a sinking fund in order to fulfil that purchase or expense. An effective method to use the sinking fund effectively is to identify based on priorities as to the avenues where it could be utilised.
Important things to remember while using sinking funds
It is important to remember that these funds are also being drawn from your account and therefore should not be treated as surplus free money. The amount of responsibility that you display towards your general budget should also be accorded to sinking funds. Similarly, sinking funds should not be treated as an alternative to an emergency fund or a savings fund. It should be used to meet purchases or other expenses and a limit should be set on how much the fund can be.
With an effective sinking fund budget, people often find it easier to navigate unexpected expenses which often occur in our day-to-day life. Therefore, sinking funds, if used properly, can be an extremely effective budgetary tool.
