You use a sinking fund to save up money to buy something in the future. The idea behind a sinking fund is to spread the cost of what you will be buying in the future over the income received during the months between now and when the purchase will happen. Sinking fund examples could include:
- New tires for your car
- Christmas gifts
- Wedding expenses
- Plane tickets
- Birthday parties
- School books and supplies
- Clothes for a special occasion
- Vacation
- Home remodel
- Down payment on a car or house
Sinking funds can be short- or long-term.
- Short-term sinking funds are used to buy relatively inexpensive items within a short time frame. Earning interest on the money set aside for a short-term sinking fund is not a concern. The money stays in the budget space's checking account.
- Long-term sinking funds are for large purchases well into the future (e.g. down payment on a house). Earning interest or dividends on the money in a long-term sinking fund can significantly contribute to the growth of the fund. The money in a long-term sinking fund is set aside by transferring the money, via a scheduled or unscheduled bill payment, from the budget space's checking account to an external saving or investment account.
Since sinking funds, by definition, are needed only when you want to “save up” money to buy something, you probably won't be using this feature often. A sinking fund, once set up, is automatically maintained by the program until the goal amount is reached.
Playing "What If?" with a sinking fund is done when the fund is first set up to determine what combination of goal amount and reach-by date is possible.