What is a Sinking Fund? Purpose, Benefits & How It Works

A sinking fund is a small fund that you keep for general expenses or emergency reserves. When you are planning for future expenses, it is easy to overlook those that do not come every month, such as:

• School fees
   
• Home repairs
   
• Car insurance
   

But these expenses require your attention. This is where a sinking fund plays a useful role. It helps you prepare for large, expected expenses by saving small amounts regularly.

23 states in India, have created Consolidated Sinking Funds to repay debt. For instance, if a state sets aside 2% of its ₹20,000 crore debt yearly, it builds ₹400 crore annually to manage repayments without borrowing.

What Exactly Is A Sinking Fund?

It involves saving a fixed amount regularly to cover a specific cost ahead of time. 
 

Suppose you are planning to buy a new smartphone worth ₹30,000. And you do not wish to take a loan or use your credit card. So, you decide to save ₹5,000 each month for six months. 

After six months, you have enough money to buy it. This example reflects the use of a sinking fund.

How Does It Work With Simple Calculation?

If you want to check the monthly savings for your sinking fund, then you can use the following simple method:

Monthly Amount = Total Cost ÷ Number of Months Left

Example:

Your child’s annual school fee is ₹48,000. You will need this amount in 12 months.

Monthly saving = ₹48,000 ÷ 12 = ₹4,000

So, you need to save ₹4,000 each month. And you will have ₹48,000 by the end of the 12th month.

Best Places To Keep Your Sinking Fund

You need to keep your money safe and accessible. These are four standard options for your reference:
 

You should opt for a saving style that works well with your purpose and timeline. Additionally, please review all the terms and conditions, as they may vary based on your profile.

Different Types Of Sinking Funds

Well, you are allowed to create multiple sinking funds based on your different savings goals. The following are the common ones:

• House Maintenance Fund
   
• Health Fund
   
• Vehicle Expense Fund
   
• Festival or Occasion Fund
   
• Education Fund
   
• Travel Fund
   
• Electronics Fund

The following is a sample planner for your monthly contributions:
 

You can make a custom list based on the expenses you expect soon.

Steps To Build Your Sinking Fund

You cannot just build your sinking funds without any planning. So, you can go ahead with the following steps:

• Note Down Your Future Costs: Firstly, you need to think about the upcoming expenses in the next 6 to 12 months.
   
• Estimate the Amount Needed: Now, you need to check the actual prices or get estimates.
   
• Set a Timeline: You should decide the timeline by which you want the money ready.
   
• Do the Calculation: Now, you need to run your math mind and divide the total by the number of months left.
   
• Track Separately: You can keep records through notebooks, apps, or separate accounts.
   
• Make Regular Deposits: You must stick to your monthly savings plan.

Sinking Fund Vs Emergency Fund

To some people, sinking funds and emergency funds might sound the same, but they are different. 
 

Role Of Sinking Fund In Housing Societies

In residential societies, sinking funds are common. Residents contribute a fixed amount, usually monthly. They utilise this money for long-term repairs or upgrades such as:

• Lift maintenance
   
• Waterproofing
   
• Repainting
   

As per the Times of India, housing societies can utilise sinking funds for other purposes such as painting and repairs. They do not need to approach cooperative departments for such permissions. 

However, tax implications have also become important. A recent ruling in Tamil Nadu states that GST is applicable on sinking fund, capital, or corpus collections made in advance for future services.

Additionally, the Times of India covered another decision where Resident Welfare Associations (RWAs) were told to pay GST on receipts towards sinking funds or corpus.

The issue has drawn attention beyond the country as well. In Malaysia, the MIPFM calls to reconsider SST (Sales and Service Tax) on sinking and maintenance funds in apartment complexes.

Final Thoughts

You might have understood by now that a sinking fund is a useful tool for better financial control. It lets you set money aside slowly and manage future costs with ease. 

You do not need to be a financial expert to start your journey of building a sinking fund. You can follow the above-mentioned easy and simple steps.

Whether you are an individual planning a purchase, a family preparing for school expenses, or a society managing building repairs, sinking funds offer strong financial support to you.

FAQs

1. Do small expenses need a sinking fund too?

Yes, even smaller, known expenses can be managed better with advanced savings.

2. Can I invest my sinking fund?

Yes, if your goal is more than 6 months away and funds are not urgent.

3. What if I miss a monthly deposit?

Try to adjust in the following month, or extend your timeline.

4. Do societies also use a sinking fund?

Yes, to manage future large-scale repairs and replacements.
 

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