Saving Money

Savings 101: Emergency Funds, Sinking Funds & Why You Need Both

I am guessing that you know how important it is to save money.

Whether you learned this directly from your parents, or indirectly from a blogger or personal finance expert, you’ve heard that a portion of your hard-earned cash should be going to savings.

I’ve known this for most of my life.

When I first started working and making money, it was only enough money to pay my bills. There was nothing left over to save.

As my income increased, I noticed a surplus after all my bills were paid. Before I learned how to budget, I would just spend the extra money on things I didn’t need…even though I knew that saving money was important.

Once I wised up, I stopped spending as much of the surplus. Without really realizing it, I was saving money.

This is a good thing, right? Not entirely.

You see, even though I wasn’t spending as much of the left over money after bills, I had no plan for it. It would just collect in my checking account with no real purpose.

In case you didn’t already know, I am here to tell you that every dollar you earn needs a purpose.

Emergency Funds & Sinking Funds
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What Is An Emergency Fund?

Emergencies are inevitable and, more often than not, they require money to resolve.

An emergency fund consists of money set aside for emergencies. Pretty straightforward, right?

Everything from flat tires to medical expenses can easily set you back if you’re not prepared. Although these emergencies are truly unexpected, the reality is that we know that they are coming at some point in our lives.

Having emergency funds in place ultimately gives you peace of mind, helping you avoid being forced to borrow money by putting expenses on credit cards or taking out loans, which puts you further in debt.

How Much Money Should I Have In My Emergency Fund?

According to an article published by CNN Money on the Economic Wellbeing of U.S. Households, 40% of Americans would not be able to cover a $400 unexpected expense.

Still, there is much debate about the amount of money one should have in an emergency fund.

In Dave Ramsey’s 7 Baby Steps, Step 1 is to create a ‘starter’ emergency fund of $1000. Once you’ve paid off debt (Baby Step 2) you’ll move onto Baby Step 3, which is building up your emergency fund to 3-6 months worth of expenses.

I think an emergency fund amount depends on your unique situation and needs.

For me, even a starter fund of $1000 is not enough for peace of mind. I consider my monthly expenses and prefer to have at least 3 months saved…as a start.

At the time of this post, my bare bones expenses every month is about $2000. So, a $6000 emergency fund is my goal. How about you?

There are several factors to consider when planning your emergency fund balance. Here are a few:

  • Are you married? If so, does your spouse work?
  • Do you have children?
  • Are you renting or do you own your home?
  • How stable is your job? If you lost it, how difficult would it be for you to find another one?
  • Do you have health insurance? If so, and you lost it, are there recurring medical expenses you’d need to cover?

Starting with these questions will help you decide how much of an emergency fund makes sense for you.

Keeping the emergency fund in mind, let’s talk about another savings category that is equally important: sinking funds.

What Are Sinking Funds?

Sinking funds, often associated with Dave Ramsey, are not a new concept in the world of finance.

I won’t go into detail about the origins of the phrase, but will discuss instead what sinking funds are in modern-day personal finance.

Sinking funds are a form of savings that includes monies set aside for a specific purpose. Like emergency funds, having sinking funds set up keeps you from having to worry about borrowing money for everyday expenses.

I like to think of sinking funds in terms of following types of expenses: recurring, unexpected, and future plans.

Recurring Expenses

Recurring expenses include money spent for events that occur on a monthly, quarterly, or yearly basis. Here are several examples:

  • Christmas
  • Birthdays
  • Anniversaries
  • Homeowners’ Association fees
  • Taxes for the self-employed
  • Professional licensure or membership renewal fees
  • Property taxes
  • Insurance policy renewals
  • Car registration (emissions test if required)
  • Subscription service renewals

All of these recurring expenses won’t apply to everyone. Factors such as marital status, residence (i.e. whether you rent or own), employment status, and others will determine which of these, or other, expenses you should be considering before starting your sinking funds.

The important thing is that you take a realistic look at how you have been covering your recurring expenses up until this point.

If you see, for example, that you often go into debt over the holidays, avoid birthday parties because you don’t want to go empty-handed, or panic around tax time, you need to figure out a way to start setting up sinking funds.

Unexpected Expenses

Unexpected expenses involve events or situations that happen usually without warning. Not being prepared for these expenses can be really set you back, causing panic and undue stress to you and your budget.

The most important thing to remember about unexpected expenses is that, often times, it is not a matter of if these events will happen. It is a matter of when.

Examples of unexpected expenses include:

  • Car trouble/ repairs
  • Home repairs/ appliance replacements
  • Medical bills (e.g illness, medications and treatments not covered by insurance)
  • Travel (e.g. weddings, funerals)
  • School-related expenses (e.g. fundraisers, field trips)
  • Speeding tickets!!

This is obviously not an exhaustive list of unexpected expenses. The reality is that there are so many ways that our budget can be hit hard by things that we had no idea would happen.

Another important point is that many of these unexpected events also fall under the category of an emergency, and are covered by an emergency fund. However, this should be kept separate from your sinking funds categories.

Future Plans

Future plans are include those things that you anticipate happening in the near or not-so-near future. Here are a few examples:

  • Home purchase
  • Vacation
  • Wedding
  • Professional certifications
  • Going back to school

These kinds of expenses do not usually come with a sense of urgency. As much as you would like to save for them as quickly as possible, there are other more pressing expenses that you have to focus on. Remembering this will help you keep things in perspective when consider your savings methods.

How To Start Saving 

Create A Budget

One of the first ways to start saving for emergencies and anticipated expenses is to create a budget.

Having a budget allows you to know exactly how much money is coming into your home, what your expenses are, and what is left over.

If you notice that you tend to spend the ‘left over’ amount on things like like eating out more than cooking, and shopping for things you don’t use or need, this is where you need to remember the importance of saving money for emergencies and anticipated expenses. This requires discipline but is worth the sacrifice and delayed gratification.

Ideally, you’ll be motivated to apply the surplus to your savings.

Earn Extra Money

Making extra money is one of the quickest ways to start saving money.

Picking up a few extra hours at work if available, taking on side hustle after work, selling things you don’t use, or finding a second work from home job are all ways to make more money.

Here are a few options to get started:

  • Become a notary
  • Sell on eBay, Facebook Marketplace, or use an app to sell locally
  • Drive for Uber or Lyft
  • Deliver for Amazon, Instacart, or Door Dash
  • Start a blog

Find A Bank With Options

Another important factor in your savings journey is choosing a place to hold your money.

For my emergency and sinking funds, I love Capital One 360.

Capital One 360 falls into the category of ‘online banking’, though they do have brick-and-mortar branches in some locations.

Like most banks, Capital One 360 offers checking, savings, money market and other deposit account options. Here are more pros of banking with them:

  • No fees for maintaining checking and savings accounts.
  • No minimum balance requirements
  • You can open up to 25 savings accounts, including money market
  • Higher savings and money market account interest rates than many traditional banks

A great feature is that you can choose to open a different account for each of your sinking funds in order to keep them separate.

I choose to have one account for both emergency and sinking funds, using a spreadsheet to keep them separate. That way, I can take advantage of the higher balance interest rate.

Give Capital One 360 a try and feel free to use my referral link here. The great news is that you will receive a $25 bonus and I’ll receive $20. It’s a win-win.

How Will You Start Saving? 

I hope you’re fired up and inspired to start saving for your present and future financial needs! 

What steps will you take to start your emergency fund and sinking funds? 


Emergency Funds & Sinking Funds

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