International Baccalaureate (IB) Practice Exam

Instead of borrowing money for large purchases, you should set money aside in a ________ over time and pay with cash.

1. Credit card fund

2. Sinking fund

3. Emergency fund

4. Mortgage fund

The correct answer is: Sinking fund

The correct answer is a sinking fund. A sinking fund is specifically designed for saving money over time to cover a large expenditure, such as buying a car or financing a vacation. By regularly setting aside a specific amount of money, you build up resources that allow you to pay for these purchases in cash, avoiding debt and interest payments associated with borrowing. Using a sinking fund is a proactive financial strategy. It encourages disciplined saving and helps individuals manage their finances more effectively by planning for upcoming costs rather than relying on credit. This approach reduces the financial strain that can come from impulsive borrowing and provides peace of mind knowing that the funds are available when needed. In contrast, a credit card fund implies accumulating a balance on a credit card, which generally leads to debt, especially if payments are not made in full. An emergency fund is intended for unexpected expenses like medical emergencies or urgent home repairs, rather than planned large purchases. Lastly, a mortgage fund suggests a focus on financing a home instead of saving for immediate large purchases, thus it does not fit the context of paying cash for expenses that could be anticipated and budgeted for through saving strategies.