SINKING FUND CALCULATION: ER. AVINASH KULKARNI

Saturday Brain Storming Thought (213) 09/03/2024

SINKING FUND CALCULATION

Sinking Fund is a fund formed by periodically setting aside money for the gradual repayment of a debt or replacement of a wasting asset

Model Bye-Laws of Cooperative Housing Society – Bye-Law No 13(C) – Creation of a sinking fund

The Sinking Fund at the rate decided at the meeting of the general body, subject to the minimum of 0.25% per annum of the construction cost of each flat incurred during the construction of the building of the Society and certified by Architect, Chartered Engineer, Income Tax approved Govt Regd Valuers, excluding the proportionate cost of the land

Sinking Fund Payment Amount

Sinking Fund Payment Amount = { A(r/n) / (1 + r/n)^nt) – 1 }

A = Targeted amount to meet its purpose

n = payment frequency or number of payments per year

t = number of years over which payments will be made

r = annual interest rate

Sinking Fund Creation Steps

1) Decide what you will save for

First step is to determine why you are saving

2) Set a monetary goal

Once you know what you are saving for, you must determine how much it will cost

3) Determine a timeline

Next, you will need to figure out when you want to have the money for the expense

4) Choose where you will save the money

A high-yield saving account is a good option for a sinking fund since you will have access to the money when you need it and earn a good return on your savings

5) Rework your budget

Track your spending and see where you can cut back to free up additional funds for your sinking fund contributions

Withdrawn of the Sinking Fund

Most people keep sinking funds in a checking or savings account, making them accessible anytime

Riskyness of Sinking Fund

A sinking fund is a very low-risk way of saving money

Advantages of Sinking Fund

1) Planning for irregular expenses

2) Saving for large purchases over time

3) Avoiding taking out a loan for sudden large expenses

4) Earning interest on your savings

5) Avoiding impulse purchases – if you plan and save for large expenses, you are less likely to succumb to temptation and buy items which you don’t need

Disadvantages of Sinking Fund

1) Slow progress – it can take a long time to save for a large expense and your saving goals

2) Budgeting woes – if you don’t have enough spare money for your sinking fund, you might spread your budget too thin to reach your goal and end up in financial trouble

3) Can be overwhelming – if you have numerous sinking funds, you can quickly become overwhelmed when trying to keep track of everything

Legal Obligations : Sinking Funds in Real Estate Regulations

These are some key points regarding legal obligations related to sinking funds in real estate regulations

1) Mandatory Establishment

a) in several regions, owners are legally required to establish sinking funds

b) The purpose is to accumulate funds over time to cover major repairs or replacements, such as roofs, elevators or structural components

2) Adequate Funding levels

a) Regulations often dictate the minimum funding levels for sinking funds based on the property size, type and projected maintenance costs

b) Failure to maintain adequate funding might result in penalties or legal consequences

3) Trabsperant Accounting

a) There are legal requirements concerning the transparent accounting of sinking funds, ensuring that contributions and expenditures are accurately recorded and reported

b) Regular financial statements may be mandatory to demonstrate compliance with regulations

4) Uses of Sinking Funds

a) Regulations typically specify the permissible uses of sinking funds, restricting their utilisation solely for designated maintenance, repairs or improvements

b) Misuse of sinking funds can lead to legal liabilities and potential legal actions by affected parties

5) Homeowners Association Responsibilities

a) Homeowner associations often have distinct legal obligations regarding sinking funds, including the proper management and oversight of thses funds

b) Failure to adhere to these obligations might result in legal disputes with property owners or regulatory authorities

6) Legal Consequences of Non-compliance

a) Non-compliance with sinking fund regulations can result in fines, penalties or legal actions from governing bodies or affected stakeholders

b) Legal disputes arising from inadequate sinking funds could lead to financial strain and reputational damage for property owners or associations

7) Legislative Variations

a) Sinking fund regulations can vary significantly among jurisdictions, with differences in requirements, enforcement and permissible uses of the sinking funds

b) Staying informed about regional legislation is crucial to ensure compliance and avoid legal ramifications

Sinking Fund register to be maintained by society

It should contain the following details

1) Name and address of the society

2) Number of flats

3) Details of owners

4) Amount of contribution received

5) Details of the bank where the amount is deposited

6) Details of amount withdrawn, if any

7) Reasons for withdrawal

8) Any other requisite details

Asset type of Sinking Fund