Is An Emergency Fund or Sinking Funds Better For Your Finances?

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emergency fund or sinking fundsAround this time of year, you might start seeing social media posts and articles from your favorite personal finance blogs that scream “Christmas isn’t an emergency, start saving now!”. While Christmas isn’t an emergency, and you should save for it, that begs the question..is it even worth it to have an emergency fund anymore? Or is the new wave of sinking funds a better choice? If you’re trying to choose between an emergency fund or sinking funds, this article is tailor made for you.

Is An Emergency Fund or Sinking Funds Better For Your Finances?

This has been written by our talented staff writer, Kimberly Studdard.

First of all, what’s the difference? And then which one is better for your situation? Let’s dig in!

An Emergency Fund

When choosing between an emergency fund or sinking funds, it’s important to know the differences between them. An emergency fund is just as it states, a fund used for emergencies.

This could be a:

  • job loss,
  • a tooth being knocked out, or even
  • something as simple as a household repair.

Typically, it’s advised that you have at least $1,000 in your emergency fund, but more people are starting to recommend 3-6 months of bare bones living expenses. This makes sense, as an emergency like a job loss could mean that $1,000 just won’t cut it to help you live.

Sinking Funds

On another note, sinking funds are quite different than an emergency fund. An emergency fund is to be used for emergencies only, whereas sinking funds are “pots” that you put money into for a specific purpose.

For example, if you were needing to save for:

  • a vacation,
  • Christmas, and
  • a new car…

…these would all be separate sinking funds.

You may need $2,000 in your vacation sinking fund, $1,000 in your Christmas sinking fund, and $10,000 in your car sinking fund. So while it looks like you need to save $13,000, you get to decide which of the sinking funds is the most important, and how much money you will allot to each fund. Once you save that money, it is to be spent on what you saved it for. You wouldn’t take the $10,000 from your car fund and spend it on the vacation instead, because that money’s purpose was for a new (or used) car.

The great thing about sinking funds is you get to break down your responsibilities. If you have a yearly subscription or cost (like eye exams + contacts), and you don’t want to see a big chunk of change taken out of your account at once, you can instead save up for it little by little each month.

Emergency Fund or Sinking Funds?

So, should you choose an emergency fund or sinking funds? Here’s the honest answer…neither are better and it depends on your situation.

If you are constantly living paycheck to paycheck and never have savings, an emergency fund would probably be your first choice. This could be due to the fact that you want to have money saved just in case, or because you’re simply tired of living paycheck to paycheck. However, if you have a lot of “little things” come up and struggle to use your regular income to afford them at the time, sinking funds may be a better option, because you can save up over time.

Emergency Fund or Sinking Funds? You Can Have Both

The ultimate savings includes a mix of your emergency fund and sinking funds. You could sock away money as a just in case emergency savings, and have your sinking funds for those items that aren’t needs but wants.

Having an emergency savings can help you when a true emergency happens, but sinking funds can save your month to month budget by helping you avoid overspending and forgetting those things that come up, like Christmas, birthdays, and anniversaries. When those events happen, instead of dipping into your emergency fund, you could instead use money from your sinking fund. Your emergency fund and sinking funds could work in conjunction with each other, each giving you the opportunity to be more financially secure.

Personal finance is a personal journey (hence the “personal” in personal finance). While there are many experts out there saying what you should and should not do, at the end of the day it is up to you to decide the best course of action for your finances and goals. This goes for your choice in an emergency fund or sinking funds too.

So, is an emergency fund or sinking funds better for you? That’s all up to you, but both never hurt anyone.

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Derek

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

3 Comments

  1. Yes, many people fall into the either/or trap, when in reality you can have both. It’s the same with other things like
    ‘invest’ or ‘pay off debt early’. Why not both? In situations like these, you can often try the split, and then see if one ends up being more favorable than the other.

    • Yup, typically both is the best answer. Agreed!


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