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Don't get it twisted! Emergency Fund vs. Sinking Fund

I'm going to keep it real with you and don't judge me. When I started my journey, I had 0 idea of what these two things were, for me it was all savings! Dividing or finding out the difference and importance for this was too much work, it was complicating my life, and there was no point to it. But...

I have to admit it was wrong and I hoped I would have taken the time to learn about this and started doing this sooner. So, yes, I'm going to talk to you today about the differences between these two funds and the importance of having these funds in place. Because although in its full technicality these funds are savings having them separated into two different funds will help you in the long run. So, let's get to it!

What is an Emergency Fund?

You probably guessed that is the money you save for in case of an emergency. Yup, you're right it is but do you know what kind of emergency?

You see because every so often you might see a sale on that purse you've been eyeing or on them new kicks that are just fire, as an emergency. But guess what? That's not it!

Your emergency fund is compiled by the following items: housing, utilities, groceries and transportation (fuel, insurance & tolls).

It is basically the four categories you need in order to survive in case of an emergency. So, what is an emergency? Basically, it's unexpected events that happen where you no longer can afford your NEEDS for a period of time. An emergency can be any of the following: you get let go from your job, you're on a medical leave, your wages were lowered.

The amount needed in the emergency fund is different for everybody because nobody's bills are exactly the same. So, you calculate your number by adding up the amount for each category which is your monthly "need" expenses. Once you do that you multiply it by at least 3 which gives you a good safety net for an emergency.

What is a Sinking Fund?

A sinking fund is a saving for basically everything else you might want or that is simply not considered an emergency. Here are some examples of sinking funds you might want to have: a vacation, car maintenance, celebrations, gifting, blessings (also known as giving or charity), car upgrade, phone upgrade, tuition etc.

How do we differentiate it when it comes to money?

Now that we know the difference between an emergency and sinking fund the main question is when it comes to our money how do we differentiate it?

This is how I like to handle the two and how I help my clients do it.

  1. Calculate the amounts. The biggest mistake any one can do is to not know how much they need for their emergency or any of the sinking fund items.

  2. Set a timeline. A goal without a due date is just a wish.

  3. Divide your extra money (the money that you will just throw it into savings) in half. One half goes to your emergency. We want that to be fully funded as soon as possible. The other half gets divided into your other sinking fund items.

I'm going to keep it real with you though, call me extra, say its trauma, I don't care in my sinking fund I have emergency sinking fund items. For me these items are car maintenance, medical expenses and tuition. So, before I thought about that vacation or phone upgrade, I wanted to make sure that these sinking funds were ready first. Because although it might not be considered a "need" it still is of high importance for me.

But you do U boo! Just make sure that you're not getting it twisted and throwing money into savings without knowing what you're saving for. Even in the savings you need to have order and a name to every dollar. If you thought this was helpful or have any questions, feel free to leave a comment and I'll make sure to get back to you as soon as possible.

Talk to you soon, besos.

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