What’s a Sinking Fund?

A sinking fund is how you save up for a specific large expense that you know will come in the future. In personal finance, it can be saving up for a new car, a down payment on a house, replacing the roof or HVAC system, etc.

In business finance it can be whatever your business will need in the future that you won’t be able to cover without planning ahead. For example, moving into a larger retail space, adding a vehicle to your fleet, upgrading equipment or machinery, etc. All of these are major purchases that you won’t be able to cover without planning ahead and saving up for them.

Ideally, you keep your sinking fund in a completely separate account. It can be another checking account or a savings account. You can have one account for multiple sinking funds or completely separate accounts if you need multiple sinking funds. But the point is to set aside money because you planned ahead. This makes you much stronger financially and this can make all the difference in the long-term health of your business.