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I'm sure I'm somewhat overanalyzing this but bear with me!

The concept of a sinking fund is to put in a little bit of money each  month into a savings account in anticipation of an irregular expense in the future. If you have a $3,600 expense every year you would divide it by 12 and know that you need to save $300 each month so that you have the money ready when the expense happens.

Obviously you'll have multiple expenses fall into this bucket (e.g. Car repairs/tires, clothing, gifts, home repairs, vet bills, etc.). Maybe you don't need to use the fund every year for some of these things, but you still have the funds there and available (e.g. you budget $1,000 a year for new clothing and only spend $500). As a result that fund will continue to build over time.

My question is how would you differentiate this from an emergency fund when it comes to savings goals?  After all, some things in the sinking fund could easily be considered emergency expenses in and of themselves (for example, we don't necessarily anticipate the car breaking down). Would it be wise to have two separate accounts: one with your 6 months expenses and one with your sinking fund? Or does it work just as well to have the sinking fund account and utilize that as your emergency fund should something come up (e.g. car breaks down and you have to pay $1,500 for repairs).

I'm struggling with this mentally for some reason that I can't quite grasp and would appreciate any opinions!

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I think Nicole Dow, a writer on the Penny Hoarder, has addressed this very topic. Maybe, look for the topic in the Search field on the main website.

My understanding is sinking funds are for things that come up perpetually: for example, car breakdowns...you know that will happen esp. if your car is 15 years old like mine, so maybe a sinking fund for that; you know property taxes are coming, so a sinking fund for that; ditto, home and auto insurance, software subscriptions, certain home repairs, and the like. I try to have one "sinking fund" for all those possibilities. Then, a separate emergency fund for the truly unexpected.

Now, when the --- hits the fan, like in COVID-19, pretty much everything can become an emergency.

I have three different accounts: Emergency fund (oh crap, I didn't see that coming), sinking fund (this expense occurs in a fixed timeframe, such as routine car maintenance, auto insurance, homeowners insurance, etc), and bill payment/grocery account.

Car breakdowns are unexpected and are classified as an emergency, so they come out of the emergency fund.  My car needs tires, oil change, etc, comes out of the sinking fund.

Last edited by AnnieB
@Omi posted:

AnnieB, that helps a lot! You make it sound simple, but I was having a brain drain on this. I thank you for the delineation between maintenance (the adulting that I have to do!), vs. emergencies, this clears up many items!

Things that fall under sinking funds:

Car maintenance, routine medical expenses (eye glasses, contacts, hearing aids, medical copays), insurances that bill quarterly, semiannually, or annually. Take the dollar amount and divide by the number of months for long term things. Add these totals up and save.  I would throw a few medical copays in there (if you have copays) because who doesn't get sick or need a prescription as a result?

For high deductible insurance, you could put money in there and/or take advantage of your company's HSA.  You just need to know the rules of using vs losing the funds. That is something you would take up with your HR Department.

You CAN cap sinking funds. Once you have your high deductible insurance in there, you would no longer contribute to that unless the limits changed or you used the funds.

@AnnieB posted:

Things that fall under sinking funds:

Car maintenance, routine medical expenses (eye glasses, contacts, hearing aids, medical copays), insurances that bill quarterly, semiannually, or annually. Take the dollar amount and divide by the number of months for long term things. Add these totals up and save.  I would throw a few medical copays in there (if you have copays) because who doesn't get sick or need a prescription as a result?

For high deductible insurance, you could put money in there and/or take advantage of your company's HSA.  You just need to know the rules of using vs losing the funds. That is something you would take up with your HR Department.

You CAN cap sinking funds. Once you have your high deductible insurance in there, you would no longer contribute to that unless the limits changed or you used the funds.

You know, I never thought about adding a cap! That makes SO much sense and takes away all the questions that I've been overanalyzing this whole time 🙂 Mentally I just keep adding the funds to the account...over and over and over...What I might end up doing is adding up the totals for the year and then capping at that amount, then toss everything else into Emergency.

Thank you!

We don't use sinking funds. We have a large emergency fund, in a money market account at our local credit union.  We are debt free except a small mortgage ($50,000). We are able to use our checking account for monthly bills, cell phones, cable, car insurance, mortgage, HOA, gas and electric. The HOA fee ($165)covers maintenance, water, and trash. We use Amazon Prime, and our relative lets us have Netflix access for free. My husband's job covers health, life, dental, vision, and disability insurance. He gets paid every week as a trucker. We simply cash flow copays and costs for car maintenance.  We keep a buffer in our checking account. We keep a separate account for dividends from our money market emergency fund, that automatically roll over.

  I have earned about money issues the really hard way--- trial and error. If you don't have a parent/guardian to explain about saving for an emergency fund or getting a decent job, money issues become  a challenge. Our biggest challenge has been my lack of prospects while my husband got his dream job (of being an underpaid school teacher in a rural county). We really struggled and only after many years (and the kids grown) do we have a few cents in our pocket.  Oh, and I'm an underpaid freelance writer, to boot! But I have a book out (see www.greatamericanidea.com), an informative bio for young and old alike. It's difficult to save with children.

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