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The best way to prepare for future expenses is to save for them in advance. Emergency Funds help cover unexpected expenses and emergencies outside of your everyday spending. Sinking funds help you achieve short-term savings goals.
Both funds are essential for families, but which one should you prioritize?
- An emergency fund is money saved and set aside for emergency expenses you encounter outside of your regular spending.
- A sinking fund is money saved and set aside for short-term savings goals and one-time expenses.
We use both as part of our money management strategy as a family. Having an emergency fund has helped our family escape some financial jams over the years. Without it, we would’ve had to use budgeted money to cover costly emergency expenses or take on credit card debt.
Sinking funds have been a revelation for us. We use them all the time to help us reach short-term savings goals, like saving for vacations, home improvements and repairs, birthday and holiday gifts, and school and youth sports fees.
Using emergency and sinking funds can improve your finances and help you develop better savings habits. We’re excited to tackle this vital topic to help you on your family money adventure.
In this episode, we discuss what emergency funds and sinking funds are, the purpose of each, and which fund to prioritize.
In This Episode, You’ll Learn:
The benefits of emergency funds and sinking funds
When to use your emergency fund
Tips for setting up an emergency fund and sinking funds
Catch These Must-Listen Moments From The Episode
[04:52] Examples of short-term goals we used sinking funds to reach
[08:03] How much money you should keep in your emergency fund
[08:32] Why you should keep these funds separate from your other money
[10:56] How to automate your savings
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Kevin Payne is the budgeting and family travel enthusiast behind FamilyMoneyAdventure.com. He’s also the host of the Family Money Adventure Show podcast, where he helps families learn to manage their money better so they can afford to do the things they love.
Kevin is a freelance writer specializing in personal finance and travel. He is a regular contributor to USA Today, Forbes Advisor, Bankrate, Fox Business, Credible, and CreditCards.com.