Enter a goal savings amount, annual interest rate, compounding frequency, and a number of periods. The calculator will evaluate and display the required monthly payment to reach the savings goal.

Sinking Fund Formula

The following formula is used to calculate the periodic payment amount to reach a savings goal.

PMT = FV * i / (1+i)^n - 1
  • Where PMT is the periodic payment
  • FV is the savings goal amount
  • n is the number of periods
  • I is the annual interest rate or return

Sinking Fund Definition

A sinking fund is a financial tool used by individuals or organizations to set aside money regularly for a specific purpose. It involves making regular contributions to a separate account to accumulate funds over time, to eventually reach a target amount.

The significance of a sinking fund lies in its ability to provide financial security and stability. By consistently setting aside money, individuals or organizations can ensure they have sufficient funds when needed without resorting to borrowing or facing financial strain.

Sinking funds are particularly important for long-term goals or anticipated expenses. They enable individuals to plan for large expenses, such as replacing a vehicle or renovating a home, by gradually accumulating the necessary funds.

Sinking Fund Example

How to calculate payments on a sinking fund?

  1. First, determine the savings goal amount.

    Determine the total final value of the savings goal.

  2. Next, determine the number of periods you have to save.

    This is most often measured in years.

  3. Next, determine the average return on the savings.

    The stock market historically returns roughly 10% per year.

  4. Finally, calculate the monthly payments.

    Calculate the monthly payments to the sinking fund needed to reach the final value.

FAQ

How does compounding frequency affect a sinking fund?
Compounding frequency affects how often interest is calculated and added to the fund’s balance. The more frequently interest is compounded, the faster the fund grows due to the effect of compound interest. This means that for the same interest rate and time period, higher compounding frequencies (like monthly or daily) can lead to a lower required periodic payment to reach the same savings goal.

What types of goals are suitable for a sinking fund?
Sinking funds are ideal for accumulating money for specific, planned expenses. This can include purchasing a new vehicle, home renovations, saving for a vacation, or preparing for large annual expenses like insurance premiums or property taxes. Essentially, any large expense that can be anticipated in advance is suitable for a sinking fund.

Can sinking funds be used for emergency savings?
While sinking funds are typically used for known, upcoming expenses, they can also be part of an overall strategy for emergency savings. However, emergency funds are generally kept in more liquid forms and are more readily accessible than funds tied up in investments that may have a fixed term or penalties for early withdrawal.

Is there a risk associated with sinking funds?
The risk in a sinking fund primarily depends on where the funds are invested. If placed in low-risk investments like savings accounts or certificates of deposit, the risk is minimal but may offer lower returns. Investing in stocks or bonds may offer higher returns but comes with the risk of losing principal. The key is to balance the risk and return based on the time frame and the importance of reaching the savings goal.