Why Everyone Should Have a Sinking Fund

Why Everyone Should Have a Sinking Fund

(IntegrityPress.org) – Budgeting can be challenging. Finding the delicate balance between income and expenses takes time and practice. Still, unexpected costs can come up throughout the year. How does a budget handle those unforeseeable costs? As it turns out, a sinking fund, often used to cover typical annual expenses such as tax payments or seasonal shopping, is a viable solution to the age-old problem of unexpected financial calamity.

A sinking fund is what it sounds like: a place to sink money for use at a later date. Aside from shopping and taxes, the tactic is also helpful for energy budgeting. People living in moderate climates may be able to predict their monthly electric bills, but that’s always true for families living near the Gulf of Mexico. Alternatively, heating bills don’t just go way up in the winter in the frozen tundras of Maine and Minnesota. They also fluctuate with the worldwide costs of petroleum.

Setting cash aside to cover cost fluctuations can make the difference between weathering a financial storm and falling into ruin. While some people might argue for using the money to lower debt first, a more reasonable compromise takes whatever money the fund has left at the end of the year and applies it to outstanding obligations already in the regular budget.

Balance is the key. Maintaining a backup plan like a sinking fund is an excellent way to achieve that goal.

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