Sinking Fund: What it is & how it is calculated | ANACITY Blog | Apartment Management Platform (2024)

FAQs

How is sinking fund calculated? ›

The sinking fund formula is typically calculated as S= (P * i) / (1 - (1 + i)^-n). This formula helps businesses determine the amount of money they need to set aside periodically to cover the total amount due at the maturity of their debt. Why do they call it a sinking fund?

A sinking fund is a reserve account that's set up to protect the value of a property. It is often used as an investment vehicle by investors who want to make sure their money will not be lost or devalued over time. Sinking funds can be used for various purposes, including: covering the costs of repairs and maintenance.

A sinking fund is an account containing money set aside to pay off a debt or bond. Sinking funds may help pay off the debt at maturity or assist in buying back bonds on the open market. Callable bonds with sinking funds may be called back early removing future interest payments from the investor.

The sinking fund formula is used to determine how much money must be put into the fund in order to meet the financial obligation that the fund was created for. The elements that factor into the formula are combined to create an equation.

A real-world example of a sinking fund

For instance, consider company ABC Ltd., which issued ₹200 crores in long-term debt in the form of bonds, paid semi-annually. The company set up a sinking fund whereby they had to contribute ₹40 crores to that fund at the end of each financial year.

The sinking fund method is a depreciation technique used to finance the replacement of an asset at the end of its useful life. As depreciation is incurred, a matching amount of cash is invested, usually in government-backed securities.

Disadvantages of a Sinking Fund

Here are some more disadvantages: Opportunity Cost: The funds set aside in a sinking fund could earn a higher return if invested elsewhere. Over-funding: There's a risk of setting aside more money than necessary, which might affect the cash flow.

As per the Bye Law No. 13 (C), “The General Body can decide the Sinking Fund contribution, subject to the minimum of 0.25% per annum of the construction cost of each flat incurred during the construction of the building of the Society and certified by the Architect, excluding the proportionate cost of the land”.

A sinking fund can also be set up by private landlords; simply by putting aside a certain amount of the rent received each month. When calculating the amount to be contributed, it is common for landlords to put aside anywhere in the region of five to ten percent of the rental income to allow to be used.

They're the perfect way to save up for any large expense. Whether you're planning a trip to Disney World or buying a new couch or even a new car—sinking funds help you pay cash for all of it and avoid the post-purchase regret.

How does sinking fund work? ›

A sinking fund is a fund that includes funds set aside or borrowed to pay off a loan or debt. A business that issues debt will have to pay off the debt in the future, and the sinking fund helps ease the burden of a significant revenue outlay.

You can use a budgeting app, like You Need a Budget (YNAB) or PocketGuard, to monitor your sinking funds. Setting up automatic monthly transfers from your main checking account to your sinking funds account can help you stay on track.

The goal of a sinking fund is to build a lump sum to be used for paying a debt or an upcoming expense. Using sinking funds is a strategy that spreads the cost of a certain known expenditure, over time. This is in contrast to savings which are money in excess that you set aside after your expenses are paid.

Answer and Explanation: The two ways to set up a sinking fund are: The first thing is through trustees who invest the annual payments of the entities in government bonds, and the other way is to either retire the bond issues or selling or purchasing bonds, whichever is lower.

A sinking fund can be used as a budgeting tool to help you save for specific future expenses that you know are coming. Using a sinking fund, you can save for the expense gradually over time rather than needing to use a credit card or use money from your emergency fund once you need to pay for that expense.

The factor i/[(1+i)n−1] is called the “sinking-fund deposit factor”, and is designated by A/Fi,n . The factor is used to calculate a uniform series of equal end-of-period payments, A, that are equivalent to a future sum F.

To determine the amount to keep in a sinking fund, identify and list the anticipated expenses and their estimated costs. “Then, divide each expense by the number of months until it's due,” Rose said. “For example, if a $300 expense is six months away, allocate $50 per month to your sinking fund.

Sinking funds are in 'trust' for the scheme and should not be returned to lessees upon assignment, or at any time. Interest earned on funds should be added to the funds unless the lease states otherwise. If funds are held in 'trust' then a tax will be charged on the interest earned.