What are sinking funds and how they provide financial relief
What's the story
Sinking funds are a smart way to keep your finances in check by putting away money for particular future expenses. It prevents you from going into debt and makes sure you have the required amount at the right time. By planning in advance, you can take care of sporadic expenses without affecting your budget. Here are five ways to use sinking funds to make money management easier and hassle-free.
Goal setting
Identify your financial goals
To begin, recognize the expenses you foresee in the future, be it vacations, home repairs, or new gadgets. Divide these into short-term and long-term goals. This clarity assists in figuring out how much money needs to be put aside regularly. With a clear picture of your financial goals, you can allocate resources smoothly and avoid last-minute financial stress.
Savings calculation
Calculate required savings
Once you have identified your goals, assess how much money you will require for each one. Divide this amount by the number of months until the expense is due, to arrive at how much you should be saving every month. For instance, if a 3-day vacation will cost ₹24,000 and is planned a year from now, start saving ₹2,000/month. This way you're always working toward your financial goals.
Automation benefits
Automate your contributions
Automating contributions to your sinking fund accounts can simplify saving efforts significantly. Simply set up automatic transfers from your checking account to designated savings accounts each month. This way, you reduce the temptation to spend extra cash on non-essential items, and ensure consistent progress toward reaching your financial targets without the need for constant manual intervention.
Account segregation
Use separate accounts for each fund
Consider opening separate savings accounts for each sinking fund category to keep things clear and organized in tracking your progress toward individual goals. Having distinct accounts avoids confusion regarding which funds are allocated where, while providing an accurate overview of available resources at any given time, making it easier when adjustments become necessary along the way.
Plan adjustment
Regularly review & adjust plans
Periodically review everything, not just about contribution amounts but also overall priorities for various categories within existing plans themselves, ensuring alignment remains intact amidst changing circumstances over time. Adjustments may include increasing/decreasing monthly contributions based on evolving needs or shifting priorities among different funding categories as required throughout life's journey.