Sinking Fund Method

You buy a shiny, brand-new car. But, being a worrywart, you can't really enjoy it. You’re already thinking ahead a decade or so to the time when you’ll need to buy another car to replace this one. "Everything ends," you say to yourself, "everything dies."

Besides being a real pill to hang out with, you do have a point. The car is a depreciating asset. Simply by driving it around, you’re wearing it out, leading to a time when you’ll have to buy a new one. Eventually, you’ll have to fork over a big pile of cash to get a new one.

Well, for you planning types, there’s a thing called a sinking fund. It's a way of saving to buy a replacement for a depreciating asset. As the asset (like the car) decreases in value over time (an accounting process known as depreciation), you invest a matching amount of cash. So...if your accountant says that, this year, your car depreciated $2,000, you put $2,000 into a sinking fund. The money generates interest until, a few years down the road, you use the cash to pay for a new car.