Emergency fund or sinking funds first
Sinking funds first. They have dates on them and an emergency fund does not, so any known expense you leave unfunded gets paid out of the emergency fund the day it arrives. Size the emergency fund in paychecks rather than months: paid every two weeks you get 2.17 paychecks a month, so three months of expenses is 6.5 paychecks and six months is 13. Six paychecks feels right and is half a paycheck short.
Three months is 6.5 paychecks, not six
The target is always quoted in months. You are not paid in months. Divide your paychecks per year by twelve and you get what a month actually holds: 2.17 paydays on a biweekly cycle, because 26 does not split evenly across 12. Three months of expenses is 6.5 paychecks. Six months is 13.
Six paychecks is only right if you are paid twice a month, where 24 over 12 is exactly 2. Paid weekly, three months is 13 paychecks. Paid monthly it is 3. The habit of doubling the month count comes from semi-monthly pay, and on a biweekly cycle it under-funds the target by half a paycheck every time.
Size it against what you would still have to pay
Take a real plan. $1,900 lands every second Friday. Rent $1,450 a month, utilities $180, internet $70, phone $55, and car insurance at $1,320 a year come to $860.79 per paycheck. Groceries at $260 and gas at $90 are the envelopes you cannot switch off, so one paycheck of essentials is $1,210.79.
That is $2,623.38 a month, which makes three months $7,870.14 and six months $15,740.27. Eating out and fun are in the budget and not in that number, because an emergency fund covers what you have to keep paying, not what you would stop.
Why the sinking funds go first
A sinking fund has a date. Car insurance in March, the deductible you know is coming, the annual subscription. An emergency fund has no date, which is exactly why it gets raided: an unfunded known expense is indistinguishable from an emergency on the day it lands.
Fund the dated things first and the emergency fund stops absorbing them. What is left is a fund that only moves for things you genuinely did not see coming, which is the only way you ever find out whether it is the right size.
Only one of them ever finishes
A sinking fund empties on purpose. That is not a setback; it is the fund doing its job, and it starts refilling the same payday.
The emergency fund has no finish line and no schedule. Once it holds your number, the money that was going into it is free, and the honest thing to do is give it a job rather than let it drift back into spending.
Written by Larder, makers of an envelope budgeting app for iPhone. Last reviewed .