The Importance of Sinking Funds

LANSING, Mich. (WILX) — From family vacations to holiday gifts, there are expenses that you know happen every year.

The costs are predictable, but many people are still unprepared.

If you rely on your credit card or dip into your savings each year for predictable costs – things you know you have to pay like your homeowner’s association fees, your car tax, holiday gifts and birthday gifts – there is a way to stop the cycle.

Experts said you might consider using one or more “sinking funds.” It’s a savings account dedicated to a particular expense that you finance little by little with regular payments.

You would add a sinking fund to your budget for expenses that occur at the same time each year or to plan for a major purchase: say a couch or a set of bedroom furniture. Your emergency fund should be for real emergencies.

The sinking fund has a specific purpose, it makes you think ahead and budget $20-30 per month to prepare for expenses that really shouldn’t surprise you each year.

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