When it comes to saving in an emergency fund or sinking fund, how much is enough? Where should you keep it? What should you use it for?
Many of us save too little, some of us save too much. It’s important to find a middle ground.
There are different ways to handle your savings. It’s best to differentiate between your emergency fund and sinking funds.
Emergency Fund vs. Sinking Fund
Your emergency fund is for exactly what it sounds like – EMERGENCIES! It has your back in case you lose your job, have a health crisis, need immediate repairs on your car or your home, or anything else urgent and necessary.
Sinking funds are for pre-planned expenses like going on vacation, buying a new car, Christmas gifts, your wedding. The list could go on, but that should give you a good idea. Your sinking funds don’t have to be urgent or necessary. Typically, they’re things you save up for for a while.
Accessing Your Money
You want to make sure your emergency fund is easily accessible in case you need it. This means don’t invest it or in an account that you can’t access immediately if need be. I keep mine in a High Yield Savings Account (HYSA) so it’s available and also earns some interest.
Sinking funds should also be kept in a HYSA, but a different one than your emergency fund. This separation helps prevent losing track of what’s for emergencies and what’s not. It also keeps you from potentially spending your emergency fund on something non-emergent, like a new couch.
Should I invest the money in my emergency or sinking funds? I’ll put it this way – if you’re investing money for a purchase you plan on making relatively soon, it’s going to be subject to the volatility of the market. This means you may actually have less money than you need when the time comes to take it out. A HYSA is safer to ensure you actually have your money when you need it.
How Much Should I Be Saving?
How much money you should be saving depends on a lot of factors. What you’re saving for is one of the biggest. We’ll talk more about what you should be saving for in the next section, but for now, how much is enough?
Your emergency fund should be around 3-6 months worth of your expenses. You should aim for more if you have kids, are a sole provider, or are self-employed/a business owner.
Sinking funds vary based on what you’re saving up for and how much you want to spend on it. Maybe you’re saving up $5,000 for a trip next year or $20,000 for your wedding that’s 2 years away. You can even create sinking funds for smaller purchases – I actually have 2. One is for my phone bill which I pay annually and set aside money for each month. The other is for gifts that I buy throughout the year.
Remember that with the 50/30/20 rule, a good amount to save/invest is 20% of your income. If you’re unsure of how much you should be saving, this is a good general rule to follow. If you’re unfamiliar, this rule allocates 50% for needs, 30% for wants, and 20% for savings. You don’t have to follow it exactly, especially if you have debt you want to put extra money towards or low monthly expenses and want to spend more on wants or investing. For more info, check out how I organize my monthly budget with these categories.
What Should I Be Saving For?
As we talked about before, you 100%, absolutely, unequivocally need to be saving for emergencies. Honestly, not having an emergency fund is its own emergency because if you don’t have that buffer, you could be f*cked in an instant if something were to happen.
Once your emergency fund is fully funded, you can focus on the fun stuff like saving for a trip to Italy, buying a new car, or even your hobbies. Another prerequisite, in my opinion, is having your debt paid off before setting money aside for fun. You want to make sure you’re financially stable and it’s much easier once you don’t have debt payments.
If you ever plan on retiring, you should also stash money away for that as well. While this doesn’t fall into an emergency or sinking fund category, I think it’s important to talk about. Investing for your retirement is so important and you’re never too young to start. I’m 23 and have nothing invested yet and it gives me anxiety 😬.
It’s also a good idea to save for your kids’ futures if you have them. A 529 plan is a great way to do this. Again, not an emergency or sinking fund, but something to think about in terms of planning for where your money goes.
What Is The Goal?
So all this is great and everything, but why? Why have an emergency fund, sinking funds, or save anything at all? Becauseeeee we avoid debt over here and cash savings is the best way to do that.
There’s no need to accumulate credit card debt, take out loans, or use sh*tty services like Klarna and Afterpay to fund our lives when we’re capable of paying for ourselves. Now this isn’t to say we never have debt; sometimes it’s necessary to take on student loans and it’s almost impossible to avoid having a mortgage if you want to own a home. However, we take on this debt in smart ways, not impulsively or without having a plan to pay it off. And we certainly don’t go into debt for nonessentials.
Emergency funds keep us from going into debt when sh*t hits the fan and sinking funds keep us from going into debt to satisfy our impulsive monkey brain that wants nothing more than to imbibe and lounge around on a week-long cruise.
So, simply put, the goal=get out and stay out of bad debt and fund the life you want. A true test of patience, endurance, discipline, and monkey brain wrangling, but well worth it indeed.