We’ve all heard about the importance of having an emergency fund for unexpected expenses. What we don’t hear about as much is the “sinking fund.”
Many people confuse emergency funds with sinking funds. An emergency fund is for just that—emergencies. These are circumstances that are unforeseen, like losing a job. Sinking funds are for expenses that you know are coming down the pike and can prepare for, like holiday gifts and car maintenance. It’s an important distinction, but many people fall into the common trap of tapping into their emergency funds with undue cause.
A sinking fund is a pool of money that you keep separate from your savings account and your emergency fund which is specifically earmarked for planned expenses that you know will strain your budget. For example, if you plan to spend $1,000 on holiday gifts, you could opt to put $100 per month into your sinking fund starting at the beginning of the year. When the holidays come, your shopping won’t put you in a financial bind. This same concept can be applied to other expenses like a new computer. If emergency funds are for rainy days, think of sinking funds for cloudy ones.
As the old adage goes: “Those who fail to plan, plan to fail.” Set yourself up for success with a sinking fund to cover those expenses you may not be looking forward to but you know are on their way.
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