![]() However, the interest costs are prohibitive unless you pay it off entirely by the next cycle. Without a sinking fund, a high cost, like insurance payment, makes a sudden dent in the monthly budget. Second, your monthly expenses are predictable and not sudden. Without a sinking fund, a large expense like insurance payment makes a sudden dent in the monthly budgetįirst, the money you need is always available for things you need to buy/spend money on. Keep a watch on the sinking fund to ensure that you do not overdraw (buy a ₹30,000 phone while you had budgeted for ₹20,000) to ensure the fund always has enough money for what you need. Refill the savings account or pay the credit card bill by redeeming it from your sinking fund. When payment comes, make it from a credit card (for points) if possible or from a general savings account. However, do not invest this money in the stock market since you need it soon and cannot lose any of it if stock markets suddenly go down. This account or mutual fund folio is the sinking fund. Interest in the savings account is unimportant as the amount you will be saving will be much less than your total wealth. If mutual funds do not work for you, just put them in a separate saving account dedicated to this. ![]() Use the figure from step 3 above and open a SIP in a liquid fund. Wikipedia: A sinking fund is a fund established by an economic entity by setting aside revenue over some time to fund a future capital expense.Ī sinking fund is an account where you save money monthly that is entirely different from your long-term goals (retirement, child education etc.) and your emergency fund (for job loss, car trouble, medical emergency etc.) ![]() Over time, as expenses change, revisit the calculation to adjust the monthly figure. Now, divide the total annual figure by 12 to get the monthly amount you need to save from your salary every month.Įven one-time purchases (first car in 3 years etc.) can come under this, where you consider the total amount you need, divide it by the number of months you have and add that to your monthly sinking fund contribution. For example, 3 lakhs of foreign vacation every 2 years is 1.5 lakhs a year you can directly add annual amounts like insurance payments you can make quarterly things like building maintenance 4 times to make it annual. Take a piece of paper (or Excel / free Google Sheets) and write down every periodic expense using the examples above.Ĭonvert them into annual values and add them up.
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