Why you need Sinking Funds and Emergency Fund? ⋆ A July Dreamer (2024)
The basic principle between sinking and emergency funds is that each is used for saving money but there are reasons why you need sinking funds and emergency funds. It is important to understand that sinking funds are often set-up to cover an ‘upcoming expense’ where as emergency funds are literally for emergencies. Often people confuse these two and consider them both to be ‘rainy day’ funds and in a way they are. They stop you from needing to borrow money or dipping into any long term savings you have set-up like retirement funds that you can withdraw from, thankfully in the UK you can’t withdraw from your NI contributions.
Saving money is not something that comes naturally to most of us and until a couple of years ago, I was no different. I used to go through periods where I would put money aside every single month for no reason and then 6 or so months later I would spend it all on meaningless things because I wasn’t saving money for a specific goal so I had no motivation or incentive to continue saving and stop myself from spending my hard earned cash. This is why most people need sinking funds and an emergency fund so they have a reason to save money and an incentive to save for something specific for for future.
Both sinking funds and an emergency fund are a type of saving that helps you cover future expenses whether big or small. When I started saving, I had no real goal as to why I was saving and what I was saving for. It is so important to to have a goal when saving money whether it is for small expenses like your car MOT or for larger expenses like buying a car or major car maintenance. This is one of the many reasons why you need sinking funds and emergency fund because sinking funds allow me to save for a specific goal and emergency fund covers me for all future emergencies.
There are many reasons why (one might) need sinking funds and (an) emergency fund for example, you might need sinking funds to cover wedding costs or even birthdays. With sinking funds you can set up as many as you need and personally I have about 9 sinking funds and I shared them all in this video and how I fund each one of them. Emergency funds on the other are mostly designed for future unexpected emergencies but there can be occasions when you might have saved for an expense using sinking funds and need to top up using your emergency fund for example a small car repair turns into a large unexpected expense.
When it comes to how much you should set aside every single month for emergency funds, it’s by calculating how much you need to cover 3-6 months of your expenses then divide by how many months you think it would take you to save up that 3-6 months of expenses. For emergency funds it pays to save a small percentage of your pay check , set up automatic deposits and only spend for emergencies. For sinking funds, you need to have a target amount and same whatever you can afford and as frequently as deemed necessary so you can spend it when you have reached you target.
Recently I read “the richest man in Babylon” and it spoke about always saving 1/10th of your monthly income. Then you needed to find a way to make that money grow and work for you in the future so it can bring more money. I think everyone would love to save money if we knew it could bring us more money in the future although today’s problem is we want instant gratification. Re-reading the book I realise the book was teaching us how to save money every single month, encouraging people to invest (either stock market or side hustles) so that it can start to work for you through stock dividend income or passive income.
When it comes to where to store your sinking funds and even the emergency fund, I recommend opening one account with a different bank from your everyday bank. For sinking funds specifically, you want one savings account that allows you an opportunity to create pots instead of multiple savings accounts, imagine having 9 sinking funds and opening 9 savings accounts. Store your money where it can grow like high yield savings accounts but don’t keep it in the stock market, the money needs to be easily accessible.
When it comes to deciding the types of spending categories for the sinking funds, you have a choice from three but can create more than one sub-category. You can set up sinking funds for one-time purchases, maybe you want to buy a laptop, recurring expenses like annual car service, you know it comes round every single year so you can save a year in advance and you can save for events like birthdays, anniversaries and the like.
Whilst an emergency fund it’s very important, sinking funds are just as important and I hope the reasons I shared as to why you need sinking funds and emergency fund were useful. Do you have any sinking funds or an emergency fund?
Sinking funds are money you set aside each month for specific savings goals. They allow you to save for infrequent expenses and plan for large expenses over time. Having sinking funds can help prevent you from withdrawing money from your emergency fund or going into debt to pay for things.
What is an emergency fund? An emergency fund is a cash reserve that's specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, home repairs, medical bills, or a loss of income.
A sinking fund is a savings account dedicated to a specific expense you know is coming. It's different from a regular or emergency savings account, which exists to help pay for unexpected expenses like a new water heater if your current one breaks.
Stockpiling savings for stormy days — literal or figurative — can help you cover financial difficulties. For many, a few hundred dollars is enough to tip the scale into debt. So a rainy day fund is crucial for when an expense that isn't in your monthly budget strikes.
Having sinking funds can help you achieve greater financial flexibility and freedom! When you're well-prepared for future purchases, you'll avoid the need to take on new debt, which could slow your debt repayment progress.
Another example may be a company issuing $1 million of bonds that are to mature in 10 years. Given this, it creates a sinking fund and deposits $100,000 yearly to make sure that the bonds are all bought back by their maturity date.
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
Emergency funds are savings specifically set aside to cover unexpected costs, like medical bills or car repairs. They are important because they can keep you from falling into debt or being unable to pay your bills if something unexpected comes up.
Emergency savings come in handy for all sorts of disruptions in life. Putting money in a high-yield savings account can help you pay for unexpected expenses, such as medical bills, or weather unexpected events like losing your job.
Sinking funds work great for things you can't or don't want to pay for in a single month's budget, like: New tires for your car. Christmas gifts. Vet bills.
Sinking funds are in 'trust' for the scheme and should not be returned to lessees upon assignment, or at any time. Interest earned on funds should be added to the funds unless the lease states otherwise. If funds are held in 'trust' then a tax will be charged on the interest earned.
Sinking funds are savings you set aside for specific planned expenses, like a vacation or home renovation. Emergency funds are savings for unplanned expenses, like a job loss or unforeseen medical procedure.
Reduce Discretionary Spending. If you are trying to increase your monthly savings, the most effective way is to reduce discretionary expenditures. These are purchases that you may enjoy but are not necessary. This way, you can add that dollar amount to your automatic monthly transfer into your savings account!
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Mandatory Sinking Fund Requirements means amounts required by proceedings to be deposited in a year or fiscal year in a bond retirement fund for the purpose of paying the principal of securities that is due and payable in a subsequent year or fiscal year.
A sinking fund is maintained by companies for bond issues, and is money set aside or saved to pay off a debt or bond. Bonds issued with sinking funds are lower risk since they are backed by the collateral in the fund, and therefore carry lower yields.
What are three reasons why sinking funds are attractive to both issuing firms and investors? They support the market price , The bond because they reduce the risk the bond will not be repaid, they reduce the risk the bond will not be repaid, the provide for an orderly repayment of a bond issue.
To determine the amount to keep in a sinking fund, identify and list the anticipated expenses and their estimated costs. “Then, divide each expense by the number of months until it's due,” Rose said. “For example, if a $300 expense is six months away, allocate $50 per month to your sinking fund.
Introduction: My name is Margart Wisoky, I am a gorgeous, shiny, successful, beautiful, adventurous, excited, pleasant person who loves writing and wants to share my knowledge and understanding with you.
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