You can put down the life jacket—a sinking fund is actually a good thing!
Why? Because a sinking fund can help you avoid high interest debt when making big purchases. Here’s how…
Put simply, a sinking fund is a savings account that’s dedicated to a specific purchase.
For instance, you could create a sinking fund for buying a new car. Every paycheck, you would automate a deposit into the fund until you had enough money to buy your new ride.
And that can make it a powerful tool. Instead of putting big ticket items on a credit card or using financing, you can instead use cash. It can work wonders for your cash flow and your ability to build wealth over the long haul.
Here are a few tips for making the most of your sinking fund…
Plan in advance
Sinking funds work best when they’ve had time to accumulate—you probably can’t save for two weeks and then expect to buy a car!
First, write a list of all major upcoming expenses on the horizon. List how much you expect them to cost, and when you plan to purchase them.
Then, divide the cost by the number of pay periods between now and then. That’s how much you need to save each paycheck to buy the item in cash. Even if you can’t spare the cash flow to save the full amount, you can at least save enough to lower the amount of debt you’ll be taking on.
What good is saving for a purchase if you can’t access the money? Not much.
That’s why it’s best if your sinking fund is highly liquid. No penalties for withdrawal. No delay between selling assets and accessing cash. Otherwise, you may find yourself unnecessarily twiddling your thumbs instead of actually making the purchase!
Remember—this is for a specific purchase on a relatively short timetable, so you might not want to put these funds in a more aggressive account. The last thing anyone wants is for their car savings to get halved by a bear market. There are other accounts specifically designed for building wealth. This doesn’t need to be one.
So before you make your next big purchase, call up your licensed and qualified financial professional. Give them the details about what you plan to buy and when. Then, collaborate to see what saving for the purchase could look like. It could be the alternative to credit card spending and financing that your wallet needs!
This article is for informational purposes only and is not intended to promote any certain products, plans, or strategies for saving and/or investing that may be available to you. Any examples used in this article are hypothetical. Market performance is based on many factors and cannot be predicted. Before investing or enacting a savings or retirement strategy, seek the advice of a licensed and qualified financial professional, accountant, and/or tax expert to discuss your options.