Financial literacy is a wonderful topic, mainly because it’s inexhaustible. You can discuss money management for years, and every time, you learn something new. Let’s talk about sinking funds. A sinking fund is a fund created to save money for infrequent, high-value expenditures. It could be anything, ranging from insurance, a car, a vacation, a retirement scheme, an investment, or even major household repairs. Sinking funds might be referred to as capital, repair, or reserve funds.
Instead of waking up one day and withdrawing 1,000,000 shillings from your bank to buy a car, a sinking fund allows you to slowly put money aside for this goal. You need to include sinking fund expenses in your monthly or biweekly budget. It could be for one or multiple reasons, but the idea is to be intentional and disciplined about it. You can even choose to be deliberate and specific by having multiple sinking funds.
Here are 6 benefits of having a sinking fund.
1. Avoid impulse purchases
It’s not uncommon to hear people impulse-buying things that were never part of the plan. We allow our emotions to blindly lead us, and this costs us. A sinking fund allows you to sit back and evaluate the necessity of expenditure before making it. When you get into the habit of saving for large purchases, you curb impulse spending.
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2. Freedom from debt
An alternative to making heavy purchases is taking a loan from the bank. So, you take a loan for that car you’ve been eyeing, or to give your house a makeover. Then, it seems like you are working backwards because you earn money and deposit an enormous chunk of it into your loan repayment.
Sinking funds help you to save up and buy things instead of taking a loan to repay later. In short, when you’re well-prepared for future purchases, you’ll avoid the need to take on new debt, which could slow your debt repayment progress.
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3. Helps you to avoid interest rates
Closely related to avoiding debt, a sinking fund also helps you to avoid interest rates which can be extremely high. Those monthly interest charges reduce your disposable income. That means less cash you can use to cover other one-time expenses that arise, investing, or putting into savings. With a sinking fund, you pay for the product at that moment once you have all the money, leaving you with little or no financial burden.
4. You can control your money better
With a sinking fund, you have better control over your money. Why? Because you rationalise heavy expenses before making them. Debt doesn’t have to be the norm. Most people have debt, so it seems socially acceptable. By opening a sinking fund and committing to saving toward large purchases, you’re changing the narrative. You’re telling your money that you’re in control of how you spend and save it.
5. Your emergency fund remains intact
An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. You need an emergency fund for a rainy day. The problem is that impulse purchases can sometimes make us dig so deep into our pockets that we spend part of our emergency fund. With a sinking fund, however, you curb that.
Known upcoming expenses, although expensive, can be offset with a sinking fund. Even if you need to pull from an emergency fund if your sinking fund balance isn’t large enough, it’s easier to rebuild your emergency fund.
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