What is a sinking fund?

Published on: Mar 7, 2009

Everyone needs savings. Whether it’s to pay for a wedding ring, a new TV or it’s more mundane like repainting the walls of your house, you can’t escape the need to put some money away. No-one would spend all their money and expect to pay for a family holiday out of one pay cheque. That would be crazy, right?

Apartments are no different. From time to time, big expenses will pop up and try to ruin your day. Some of them can be planned but others turn up when you least expect it (and least want it too!). Just like saving for your own expenses, your management company should be doing the same. Part of each years fees should be put into a separate account, called a sinking fund. This is your rainy-day fund and should never be touched for day to day expenses. It’s there so when your lifts have to be replaced (which costs an arm, a leg and lots more besides), the managing agent doesn’t have to ring everyone up and ask for a several hundred euro contribution. That’s a nasty surprise no-one wants to hear.

The other advantage is that sinking funds are fair. Everyone pays a share of the costs each year so people who use the lifts for ten years and then move out, have paid to replace them. People who move in just before they work is done aren’t penalised. Even people in the know can’t decide to suddenly sell up to avoid a big charge they-alone know is coming.

Each year, the board of directors should decide on a percentage and immediately move that money into a different bank account. You can be paranoid and require more signatures or even different signatures to make sure the money stays where it belongs. It might even be worth moving it into a term deposit account where you can’t quickly get access to it. It also means it’ll grow faster which is good news when the day comes to spend it.

The two golden rules of sinking funds are:

* No matter how bad your finances are, you must have one. You’ll regret it down the road if you don’t.

* No matter how good the sinking fund is doing, resist the temptation to spend it on low priority projects. Murphys Law tells you that just after you spend it on new plans or new signs, the roof will blow off and you’ll need it!

Here are a list of things your sinking fund could be spent on. Some of them will require repairs but others could be replaced entirely to give you a better service.

* Fire Alarm System
* Pumps
* Water Tanks
* Rooves
* Guttering repairs
* Re carpeting of common areas
* Painting of common areas
* Repair works to kerbstones, footpaths