Planning beforehand for any impending expenses is a good way to thrive in any financial environment. However, saving for substantial expenses has historically proven to be burdensome to most. Even if you consider that you can pay your casual monthly bills with ease, you might just be one catastrophe away from off-setting what little you have in savings.
To make ends meet, one may have to exhaust savings, postpone potential investments, and in the worst-case scenario, one would give in to borrowing. It is a factor, none of the three options is ideal for achieving your financial goals that may include paying down debt and saving for the future.
In a situation like this, don’t you wish you had a little something on the side? Fortunately, there’s a simple answer to how to save, for something special like a holiday, buying the latest gadget or even maintenance expenditure (e.g. new car tyres).
A sinking fund can be a successful savings strategy to steer clear of unforeseen financial complications. This can motivate you to stash away some money for such unanticipated circumstances. A sinking fund today could be a low-effort way to save for upcoming expenses.
So what is a Sinking Fund and how does it work?
A sinking fund is dedicated savings account for a single planned expense. This fund is separate from a normal savings account. There are two significant boundaries for effectively and efficiently operating your sinking fund:
1. You must intentionally save for a specific expense.
2. You should not use your sinking fund to cover another cost.
How big your sinking fund is and how often you make a contribution is up to you but let’s consider the example of:
You, wanting to buy the new iPhone 13, which could set you back about PKR 200,000 if you bought it today. However, contributing PKR 16,000 a month would rather ease up the pressure of spending a large amount in one month without it actually disturbing your other expenses.
Why a Sinking Fund?
A sinking fund may just be one of the best money moves you can make this year. The potential advantages of doing so are:
1. You avoid a credit trap (and any interest Payable).
2. It can help to put a stop to impulsive buying.
3. Potential interest receivable (if the sinking fund is operated in an interest-bearing account)
4. Facilitates your ability to cover up your monthly expenses and enables you to ultimately enjoy the fruit of your hard work -because you have worked towards achieving a goal.
5. It promotes financial freedom, which you definitely need!
We’re excited to know what you think about sinking funds. To learn more, follow us on Instagram, Twitter & Facebook or visit our website, www.nurtureinvestments.net