AON Knowledge Library
What is a sinking fund?
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 legislation sets out when and how a sinking fund must be established, and the amount of the annual contribution.