sinking fund
A fund established by setting aside money regularly to repay a debt or replace an asset at a future date, reducing the risk of default.
Example
“The couple created a sinking fund, saving $200/month so they could pay cash for a new car in three years.”
Memory Tip
SINKING fund = money that makes debt SINK (disappear) over time. Save now, pay later.
Why It Matters
A sinking fund helps individuals and businesses manage large future expenses by breaking them into manageable regular payments rather than facing a sudden financial burden. This approach reduces financial stress and the risk of defaulting on obligations when major costs come due.
Common Misconception
Many people mistakenly believe a sinking fund is the same as a savings account or emergency fund, but it is specifically designated for repaying a known debt or replacing a specific asset on a predetermined schedule. The key difference is that sinking funds are earmarked for particular liabilities, not general savings.
In Practice
A homeowner might establish a sinking fund to replace their roof in 10 years, which is estimated to cost 15,000 dollars. By setting aside 125 dollars each month, they accumulate exactly 15,000 dollars by year 10 without having to take out an emergency loan or deplete savings when the replacement becomes necessary.
Etymology
From the idea of 'sinking' (paying down) a debt — money set aside to make debt gradually disappear.
Common Misspellings
Build a budget and track your spending
Related Terms
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See Also
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