Do I need both????
Let's face it - we all have unexpected expenses that happen- and 9 times out of 10 - IT'S AT THE WORST POSSIBLE TIME!!! One way to take control of the curve ball that life sometimes throws at you, is to have proper savings accounts set up to cover these costs. We've all been at the crossroad and intersection of "Do I pay for a new dryer right now or do I take a family vacation?" Why should you choose - let's tackle BOTH!!
Well, what is the difference between the two, you may ask?
An Emergency fund is used to save for "unexpected" expenses, while a Sinking fund is used as a strategic way to plan for "expected" expenses. They both prevent the need to dip into your regular savings account, take out a personal loan, or max out credit cards.
First, let's dive into Emergency Funds.
Just as the name suggests - they are set up to handle life's Emergencies - such as loss of a job, surprise medical expenses, home repairs, or car repairs. Dave Ramsey suggests starting with $1000 in your emergency fund and then strive to save at least 3-6 months of living expenses. Having an Emergency Fund gives you peace of mind that if something comes up that's unexpected - you will survive financially. You can handle it without going into debt. And right now with the state of our economy - these funds are mandatory!!!!
Moving on to Sinking Funds.
This fund is money set aside either on a weekly or monthly basis to cover expected expenses you've already planned for. Examples include, Christmas planning, family vacations, buying a new appliance, or summer camp to name a few. I LOVE SINKING FUNDS because it allows me to spend without feeling guilty. I call it my FUN ACCOUNT!! We use it to buy Christmas gifts and to plan our family vacations. We simply set a budget for each so when time comes - it's covered - without interrupting our regular expenses.
See below examples of Sinking Fund categories from mommanagingchaos.com