In our daily lives, there are few items which are high ticket items like Car, LCD TV, AC etc . Other than that there are other expenses also which are large ones like paying the renewal premium of your life insurance plans etc. Now each of these products do require a significant amount of money to first buy them and then replace them as and when required. None of these items last life long and as such will have to be replaced at some point in time.
In the absence of any planning towards meeting these expenses , the renewal/replacement of any high ticket items can place undue stress on the your finances. And as such you need to have a sinking fund.
What is Sinking fund?- Sinking fund is a fund where a small amount of money is saved regularly towards meeting a large ticket expenditure like buying a new car or replacing an old car etc. It is similar to a depreciation fund used by corporates where they save a percentage of the cost of buying new machinery in the depreciation fund so as to be able to buy the new machine without any problem. We all need to have our sinking fund to meet the expenses of our big ticket items.
What is it meant for?-To ensure that a person does not have to suffer from the stress of making large payment at once for high ticket item like car insurance, new car , new TV etc. It will ensure that you would have saved enough to pay for these expenses without any trouble or stress.
How does it work?- Save small amounts regularly separately for a specific purpose.You can open a separate bank account for this and make SI for the amount to be saved.
How is it different from Emergency fund ?- Emergency fund is not meant for any specific purpose. It is meant to be used in case of some crisis like job loss etc while sinking fund is used to save for a specific purpose.