When you start to make some adjustments in your financial journey from beginning to create and stick to budgets, to taking advantage of compound interest, you’re going to begin to feel the urgency to have even more concrete systems to ensure you reach your goals.
Even when you plan, life still happens and you learn that you can’t really plan every single life event but you can be prepared.
Here are two types of funds that can ensure that you don’t feel stuck or that you’re able to make purchases without denting your pocket.
What I (and probably what other people) thought is that an emergency fund is supposed to take care of your recurring expenses. Things like school fees and any random thing that you might not have budgeted for prior. But an emergency fund is for emergencies. Yes it’s in the name. Emergencies are life events/incidences that you could have never planned for or predicted like accidents, car breaking, your roof caving in.
This fund is meant to ensure that things don’t get too crazy for you in case something unexpected comes up and that you’re able to take care of the expenses that may come with these surprises. This is often why people are told to put aside 6 months worth of expenses in case they lose their job. You might be doing your best at your job, hitting those goals and beyond, your boss might love and value you as an employee but somehow the company loses money and has to close down. This would be completely out of your control but you can do your part to be prepared.
You know those things you have to or would like to pay for but are just so painful to remove a big chunk of cash for? Sinking funds are for expenses that you may have planned for but are irregular and not for emergencies. The origin of this financial principle comes from companies who would save up money in order to pay back a debt in the future. In personal finance, sinking funds work the same way.
You save up money to pay for a large expense in the future, so you don’t have shocks in your budget and can reduce the chances of going into debt to bridge any gaps that come along For example, you want to go on vacation and don’t want to empty your account completely but still want to have fun. You can accumulate some money intended specifically for that purpose so that you comfortably have the vacation or upgrade your phone or pay your child’s school fees.
So, in conclusion, you need both emergency funds and sinking funds as part of your financial system. If you don’t know where to start, we have a free guide, How to Stop Freestyling your Finances that’ll get you started.
See you on the other side of stress-free money management!