What is the primary purpose of using a sinking fund?

What is the primary purpose of using a sinking fund?

• A. Building an investment portfolio
• B. Making large purchases
• C. Paying off debts
• D. Creating an emergency fund

Answer: (B)

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.

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.