Managing finances is not just about saving and investing. There are times when you need a special strategy so that you are not overwhelmed when you have to make a sudden large expense, for example when you have to service your vehicle, pay annual taxes, or want to take a vacation at the end of the year. This is where sinking funds become important in personal financial planning.

Although it sounds unfamiliar, sinking funds can actually be your financial savior. You no longer need to touch your main savings or emergency fund because you already have funds that are prepared regularly for certain needs. Unfortunately, there are still many who do not understand or even confuse the function of sinking funds with emergency funds.

Therefore, get to know more about what a sinking fund is, its benefits in life and how to practically apply it in your financial planning. Treasury has summarized them in the article below.

What is a Sinking Fund?

Sinking funds are funds that are set aside regularly for certain needs or expenses. This fund will later be used for something that has been planned in the future. Usually, this fund is allocated for big expenses such as vehicle registration renewal, vacations, annual vehicle servicing, and buying new gadgets. The purpose of a sinking fund is to prevent you from taking money from your savings or emergency fund.

The sinking fund strategy is very effective because it is specific and planned. Unlike regular savings, each sinking fund has clear goals and deadlines. This method makes you more disciplined in managing money and avoid using it for other things.

Difference between Sinking Fund and Emergency Fund

• Purpose

The main purpose of a sinking fund is predetermined because these expenses are planned, such as vehicle servicing, vacations, or big purchases. Emergency funds, on the other hand, are used for urgent and unexpected needs, such as job loss or medical expenses.

• Time of Use

The funds that we collect for the sinking fund will be used at a predetermined time. Unlike emergency funds, the time of use is uncertain because we never know when crises and urgent conditions will come.

• Amount

The amount of sinking fund depends on the specific goal so it can be adjusted and divided by the amount per month. Ideally, an emergency fund should amount to 3 to 6 months of living expenses so that in times of crisis we can still fulfill our needs without having to rely on our salary and savings.

Also Read: 4 Tips to Choose Investment for Emergency Fund – Treasury

5 Benefits of Sinking Fund

1. Avoid Consumptive Debt

A sinking fund strategy can help you buy items or pay for obligations without having to go into debt or installments. This method is very helpful in maintaining financial health because you are not burdened with interest or monthly bills from consumptive debt.

2. Reduce Financial Stress

Knowing that funds for annual or seasonal needs have been prepared in advance will provide a sense of calm. You don’t need to panic or be confused about finding additional funds when the time of spending comes, because everything is already available and according to plan through a sinking fund.

3. Helps Short and Medium Term Planning

Sinking funds make it easier for you to budget based on specific needs in the next year. Finances will be more organized and all major expenses can be managed measurably from the start using this strategy.

4. Train Financial Discipline

You indirectly train the habit of managing finances in a disciplined and consistent manner by setting aside funds regularly for certain purposes. This will have a positive impact on your financial lifestyle in the long run.

5. Maintain Emergency Fund Stability

Because the predicted needs are financed from the sinking fund, you do not need to take emergency funds for things like paying vehicle taxes or buying new gadgets. Your emergency fund will remain intact and ready to be used only for real emergencies.

How to Create and Manage a Sinking Fund

Creating and managing a sinking fund is actually quite simple, but it requires commitment and consistency. The first step is to determine the purpose of the sinking fund. Make a list of major or routine needs that can be predicted within a certain period of time.

Once the goal is set, calculate the overall estimated cost. Then, divide the total cost by the number of months remaining until the time of use. You can use the following simple formula:

Sinking fund per month = Total need ÷ Number of months remaining

For example, if the cost of a vacation is estimated at Rp6,000,000 and will be done in 10 months, then you need to set aside Rp600,000 per month to meet the target on time. The next step is to separate the sinking fund from the main account.

You can create a separate account, use a digital wallet, or automatic savings feature in the financial application so that you are not tempted to use the funds for other needs. Physically separating funds also helps you be more disciplined and clear in managing each financial post.

Managing personal finances is not only to protect yourself from unexpected events, but can also be used to prepare for things that you have planned. This is why sinking funds are an important component in a healthy and smart financial strategy.

No more panic moments when you have to pay for annual or seasonal needs, because everything is neatly prepared. Life becomes calmer and stress-free. Let’s start making a list of annual needs and start sinking funds now!