International Baccalaureate (IB) Practice Exam

Which strategy is often used to manage future purchases that require substantial funds?

1. Sinking fund approach

2. Investment strategy

3. Emergency savings plan

4. Budget planning

The correct answer is: Sinking fund approach

The sinking fund approach is a financial strategy specifically designed to accumulate funds for future expenses or purchases that require a significant amount of money. This method involves setting aside a fixed amount of money regularly over a period of time to ensure that the necessary funds are available when needed, thus preventing financial strain at the time of the expense. The primary benefit of a sinking fund is that it allows individuals or organizations to plan ahead. By gradually saving money, the pressure to pay a large sum all at once is alleviated, which can contribute to better financial stability. This strategy is particularly effective for planned expenditures such as purchasing a car, making a home improvement, or paying for large events. Other options, while valuable financial concepts, serve different purposes. An investment strategy is more focused on growing wealth over time through various investment vehicles, which may not directly relate to saving for a specific future purchase. An emergency savings plan is designed to cover unexpected expenses that arise, rather than planned purchases, and budget planning helps in managing overall financial health without specifically targeting future significant expenses. Thus, the sinking fund approach stands out as the most suitable strategy for managing anticipated large purchases.