Sinking Fund

With gas prices so high, everyone is looking to save money. One way to save money on the purchase of a new car is by setting up a Sinking Fund. You can open up an account that earns interest and put money into this account. Here is an example.

Let's say you want to buy a car and your loan is $18,000.00. The interest rate is 8% compounded monthly for 5 years.

Let's say you can set up an account that earns interest at 1.5% compounded monthly.

Below is a screen shot of a spreadsheet I set up that compares a Sinking Fund and Amortization payments. Look on the right hand side of the screen under "Links" and click on "Spreadsheet Files" to download this spreadsheet. It is in Open Office Calc. Let me know in the comments if you would like me to post an Excel version and I will convert it.

It shows your monthly payments for each over a 5 year period and shows you how much money you can save by using a Sinking Fund.

Note: m represents the number of compounding periods per year.

• m = 2 (semiannually - two periods per year)
• m = 4 (quarterly - four periods per year)
• m = 12 (monthly - twelve periods per year)
• m = 365 (daily - 365 periods per year)