These days, if we don't manage our finances wisely, our savings can easily become depleted. In other words, it's gone without a trace. This is especially true with the increasing number of online shopping offers and notifications with their tempting promotions.
So, to keep our savings safe, we can follow a savings tip called a sinking fund. This term may be rare, making it seem unfamiliar. Many people even think a sinking fund is just another term for an emergency fund. However, the two have several significant differences.
A sinking fund is actually a savings concept that many people use. However, unlike saving for an emergency fund in general, a sinking fund usually has a more specific purpose. We save for significant expenses.
So, what exactly is a sinking fund? How is it calculated? Let's take a look at the following explanation:
What is a sinking fund?
According to Investopedia, a sinking fund is money set aside for a specific purpose, such as starting a business, investing, buying a car, renovating a home, funding a wedding, children's education, paying off debt, and more. All of these require a significant amount of money.
Therefore, a sinking fund should be a mandatory funding channel in your financial planning. This is because these funds are allocated for very specific needs and for a clear purpose.
What's the difference with an Emergency Fund?
An emergency fund is used for uncertain purposes and urgent needs, such as accidents, illness, layoffs, and various other pressing needs. With a sinking fund, we allocate funds from savings and deliberately set aside for specific needs.
Furthermore, the amount is also different. Ideally, an emergency fund should be at least three times a month's expenses. Meanwhile, the sinking fund amount should be calculated based on the exact amount of the desired goal. For example, if we want to raise funds to buy a car worth IDR 300 million, the sinking fund should be exactly the same amount as the car's price.
The final difference lies in priority. From a financial planning perspective, an emergency fund is the top priority, as it must be set aside. A sinking fund, on the other hand, is created after all other primary financial needs have been met. This is because the sinking fund is relatively non-urgent.
Implementing a Sinking Fund
The way a sinking fund works is relatively simple and easy to implement. To implement it, a sinking fund is set aside separately from your primary savings. These sinking fund savings will then be used for planned secondary needs.
So, you could say a sinking fund is a fund that can be used without guilt, because it is specifically set aside for funds outside of basic needs.
Simply put, every month, set aside money for several predetermined categories, such as buying a car, renovating a house, or paying for a wedding. The categories are also indicated by the date when the funds will be used. Then, set aside funds little by little, without having to spend a large sum immediately to achieve your goal.
Just like savings or emergency funds, we must be disciplined in allocating funds to a sinking fund. Therefore, strong determination is required while accumulating this type of savings.
Sinking Fund Formula and How to Calculate It
There's no definitive sinking fund formula because it depends on each person's financial situation. For example, let's say we want a motorcycle with an estimated price of Rp20 million. Our monthly income is, say, Rp10 million. To calculate it, first determine your primary financial allocation and its percentage. The remainder will be allocated to the sinking fund.
The breakdown is usually 30% for basic needs, 10% for investments, 20% for emergency funds, 10% for donations, and 30% for the sinking fund. Based on these percentages, the sinking fund formula is 30% x Rp10 million = Rp3 million. By diligently setting aside Rp3 million each month, we could have a new motorcycle by the seventh or eighth month.
If we want to achieve this faster, we'll need to allocate a larger amount to the sinking fund. And vice versa.
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