There are a lot of considerations when you decide to save up for something, and the type of account you use is one of them. The difference between the sinking fund and emergency fund can be confusing – it’s no surprise that which type you choose can have a big impact on your savings.
Some might ask if there’s a difference between a sinking fund and an emergency fund. A sinking fund is savings invested for startup costs for a project and earnings from these funds are typically used to help finance the project. An emergency fund is a fund that is designed to cover unexpected expenses, such as job loss, medical bills, car repairs, or natural disasters.
- How to Create a Sinking Fund
To create a sinking fund, set aside money each month in a high-yield savings or money market account. This account should be separate from your savings, which should be used as an emergency fund. You can allocate different amounts of money to the sinking fund depending on the project’s size and the cost of materials needed. You can also add contributions from others if they are contributing to the project. Sinking fund accounting treatment can be quite flexible and the funds can be invested in a wide array of investment vehicles.
- Where to Set Up Your Sinking Fund
Sinking funds are usually set up at banks or credit unions. These institutions provide higher interest rates and better loan terms, as well as customer service. If you do not have an account with one of these institutions, start looking for one where you can open a separate account for your sinking fund.
- How to Create an Emergency Fund
To create an emergency fund, set up a separate savings account that you can access when you need to cover a surprise expense. Start by saving $100 or 10 percent of your monthly income, and then increase the amount each time you get a raise or another source of income. You can also use your credit card to pay for expenses and put that amount aside in a separate account. An emergency fund will help you deal with unexpected expenses such as job loss, medical bills, and car repairs.
- An Added Bonus: Preserving Your Credit
Having a savings account will help you build credit and reduce your reliance on credit card debt. A savings account can also serve as a place to put money aside for future purchases, including a vehicle or home. When you save money in a savings account, money is deposited into your account and you pay a financial institution to hold onto it. If you want to access that cash, you must pay an additional fee by withdrawing the money or writing a check against the funds.
- Emergency Funds and Savings Goals
It’s also helpful to create separate emergency funds for different life events. If you have an emergency fund for job loss, you will eliminate the risk that your home could be lost or your car would stop running if you lose your job. Be sure to review your emergency fund yearly, adjusting the amount based on tax and salary changes.
If you want to save money for a project, or grand scheme, or need to cover unexpected expenses, invest money into a sinking fund that will be used to help finance the project. If you want to cover unexpected expenses, set up an emergency fund so you can access the money when you need it. Both of these saving methods are helpful, but it’s important to know when to use each one.