There are lots of things that go into drafting a budget. A perfect budget must account for almost every single expense you might incur during a certain period. Also, the budget should include sinking funds. The sinking fund strategy is most common in the corporate world, but you can also incorporate it into your finances to help you with your expenditures.
What’s A Sinking Fund
A sinking fund entails the fixed amount of cash you save each month or week in preparation for non-monthly expenses like health care or property repair and maintenance. Other examples of sinking funds include television subscriptions, holiday gifts, vacations and medical expenses not covered by your insurance policy.
To reap the benefits of a sinking fund, it’s best to set it up in a separate account from your savings or regular account. That way, it’s much easier to plan and navigate your finances. Like any other way you deal with your finances, this strategy has its benefits and disadvantages.
Benefits Of a Sinking Fund
Provides A Cushion for Irregular Expenses
It’s impossible to predict what will happen in the next minute; hence, you may incur some expenses you hadn’t planned for, such as a date or an impromptu contribution to a charity. When such costs occur, having a sinking fund comes in very handy; as a result, no surprise bills will surprise you.
It Helps You Avoid Going into Debt
Most people tend to place their savings in those fixed saving accounts that only allow you access to your cash when specific parameters are met. Also, when making payments for irregular bills, most people prefer using their credit cards which puts them in debt, but with a sinking fund, you can pay for such expenses without going into debt.
Act As an Emergency Fund
Apart from being a fund for irregular expenses, a sinking fund might serve as an emergency fund whenever you need one, and you won’t have to dip into your savings.
It Helps Avoid Impulse Purchases
Since a sinking fund focuses on saving so that you can buy a particular item or service during the saving process, you might realize that the need for that item or service has diminished, helping you avoid impulse buys.
You already know that saving money in a bank earns you interest so does your sinking fund.
Disadvantages Of Sinking Funds
Finances Are Spread Thin
A sinking fund is usually different from your savings and regular accounts, meaning that for you to have a sinking fund, you have to split your income into more than two ways which in turn spreads thin your finances.
It Complicates Your Finances
Your finances tend to get complicated once you try to service more than two accounts which may result in you making costly mistakes with your finances.
Requires You to Be Disciplined
Having a sinking account requires you to be very disciplined financially, but as we know, when the sinking account gets to a substantial level, most of us can’t help ourselves. Hence, we find ourselves spending that cash on some unnecessary items.
Having a sinking fund gives you certain freedom such that you might be saving for a new car but find yourself getting the latest smartphone under the guise that you’ll save again, a decision that you immediately regret.
Having a sinking fund is a wise choice, especially if you have a bad spending habit. So, start a sinking fund today and enjoy the benefits.