What it is
In personal finance, a sinking fund refers to the money you save little by little for a huge, planned expense, like a new car or home improvements.
In business, the same term refers to money that a company sets aside over time to repay debt (like bonds) or replace a depreciating asset in the future.
Sinking funds allow both individuals and companies to gradually build a cash reserve over time for a future financial obligation so they won’t need to come up with a large amount of money all at once when the time comes.
What it means for you
Setting up a sinking fund can help minimize the strain of big purchases on your monthly budget since it lets you start small and save regularly until you have enough money.
It is different from an emergency fund, which is the money you put away for unexpected costs and typically contains 3 to 6 months of living expenses.
While emergency funds are for unavoidable but necessary spending, sinking funds can be allocated for wants or expected needs. A sinking fund can allow you to spend on luxuries while staying within your budget.
