Emergency fund vs. sinking fund: which comes first?
Do not fully fund one while leaving the other at zero. First build an emergency cushion for an unexpected bill you could not absorb from one paycheck. At the same time, fund any known expense due before you could save for it later. Then keep contributing to dated sinking funds while growing the emergency fund toward your chosen number of months of essential expenses.
Unexpected expense or known expense
An emergency fund is for costs you did not plan: a repair, medical bill or loss of income. A sinking fund is for a cost you know is coming: insurance, gifts, school supplies, tires or an annual subscription.
The test is not whether the bill feels painful. Ask whether you knew what it was for and roughly when it would arrive. If yes, it belongs in a sinking fund; if no, it may belong in emergency savings.
Which one to fund first
Start with some emergency protection rather than waiting until every known expense is fully funded. Pick a first target from the unexpected costs you have actually faced and could not cover from one paycheck. Even a partial cushion can keep a small shock from becoming new debt.
Next compare dates. If car insurance is due in four paychecks, it needs a per-paycheck amount now. Continue a smaller emergency contribution beside it, then redirect that sinking-fund contribution after the bill is paid. A real deadline decides the split better than a universal order.
How big the emergency fund should be
There is no single correct dollar amount. Count the essential expenses you would still owe during an income interruption — housing, utilities, food, transport, insurance and required payments — and multiply that monthly total by the number of months you want covered.
Using a standard 26-paycheck year, three months equals 6.5 average pay periods and six months equals 13. Convert the expense target, not your salary: the fund is meant to replace essential spending, not every dollar of normal income.
Keep the money separate by job
A sinking fund empties on purpose when the named bill arrives, then starts again if the expense repeats. Using it is the plan working, not a setback.
Emergency savings should remain available for an unplanned shock and be rebuilt after use. Separate labels or accounts make it harder for a known annual bill to quietly consume the money meant for an actual emergency.
Written by Larder, makers of an envelope budgeting app for iPhone. Last reviewed .