In the 17th and 18th Centuries, money was still real, and governments could not just print money to fund their operations.
During war or natural calamities and for building infrastructure, the states had to raise money by floating bonds.
While these bonds were floated in a hurry, typically, there needed to be a working plan to repay the debt.
399 years old Dutch Bond Still paying interest.
In response, The Sinking funds(Opposite of Floating) were created to save money for repaying these bonds.
This concept was adopted in Modern Finance to repay bonds and to buy back preferred stocks. It is also used to fund future large purchases(Capital expenditure).
What is a Sinking Fund?
A sinking fund is an account where a person or entity sets aside money regularly to fund a specific goal.
Sinking funds were very popular among entities and individuals before the explosion of easy commercial /retail credit.
In the last few decades, people have resorted to borrowing for almost everything, leading to overconsumption and debt burden.
How does this help me?
A Sinking fund can help you with the following benefits;
- Avoid impulsive purchases
- Divert money to important goals
- Make Budgets more efficient
- Avoid borrowing and interest burden
- Guilt-free spending and consumption
- Be a role model for your children on good money habits.
How does this work?
Let's say you want to buy a property worth AED1,000,000. You would need 20-25% of the property value as a downpayment.
You can borrow the difference and buy the property if you have already saved money for the downpayment. But what if you don't have the money yet?
You can create a separate account(Sinking Fund) specifically to save money for the downpayment and fund this account regularly.
You can also create sinking funds to save money for your short and medium-term goals like;
- Buying a car
- Funding a Marriage
- Annual Vacation
- Annual Rent Payments
- Buying Electronics / White goods
- Home Renovation
- Refurnishing your home
The success of your sinking fund depends on your dedication to saving and your discipline to use the money only for the specific purpose it was created.
Where to keep the sinking funds?
A few places you can keep your sinking fund(s) are;
- E-Saver Accounts with an auto-transfer mandate
- National Bonds
- Goal Accounts with an auto-debit facility
- Recurring Deposits
In the world of Consumerism, instant gratification, and same-day shipping, let's sink our goals into dedicated funds and win with money.
Let me know what you think of a Sinking fund.
Does this idea excite you?
What are the goals you want to dunk in your sinking funds?
Please drop a comment on our Facebook group.