A sinking fund is different from a savings account in that you set it up to use only for a specific purpose. With a sinking fund, you can make sure that you have enough money to pay for unforeseen expenses, such as car repairs. This will reduce your risk as an investor, and lower your interest rate.
An example of a sinking fund is a company that issues a million bonds with a par value of $100 and a 5% coupon rate. The firm needs to establish a sinking fund provision to pay off the bonds over a specified period of time. The formula assumes that the money will be paid off in 20 years, with semi-annual or biannual payments.
Once you have a sinking fund in place, you need to make a list of expenses. This list should include things you pay for each month, as well as items you wish to purchase. This list can include car insurance, holiday gifts, and vacation spending. You should also note the date by which you need the money.
The sinking fund formula is a calculator that can help you determine how much money you should set aside each month. This tool will help you avoid making lump-sum payments to creditors in the future.