What is the primary purpose of using a sinking fund?

The primary purpose of using a sinking fund is to set aside money over time for making large purchases. This financial strategy involves allocating a specific amount of money on a regular basis into a designated fund so that when the time comes for a significant expense—such as a car, home renovation, or major appliance purchase—there is sufficient cash available. By using a sinking fund, individuals can avoid using credit or loans that may incur interest, enabling them to make these purchases without financial stress.

Establishing a sinking fund also helps with budgeting and financial planning, as it encourages individuals to save systematically rather than relying on impulse buying or last-minute financial arrangements.