Emergency Funds vs Sinking Funds (Which One Is Better To Have?)

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Emergency Funds and Sinking Funds

Your definitive guide on the difference and importance of both an emergency fund and sinking fund.

Welcome back to the Master A Budget Series! Yesterday, we talked about Budget Categories and Percentages; today, you will learn about the Emergency fund vs Sinking Fund.

Let’s dive in.

I think you will agree with me when I say that life is full of surprises, both good and bad. I would not mind it if it is good all the time,  however, what if it is bad?

Well, nothing we can do to prevent that. We can always whine and complain about it, which won’t do any good.

Or we can always do something to prepare for it.

As Murphy’s Law says, “Anything that can go wrong will go wrong,” therefore we always need to have a plan.

That’s where emergency fund and sinking fund come in.

Confused about emergence fund and sinking funds? Check out these tips.

What Is An Emergency Fund

Some may question the necessity of an emergency fund. After all, is it really necessary? How do you go about it? Does it need to be a huge amount? 

Here are some ideas and suggestions that should help answer these questions.

Is an Emergency Fund Necessary?

Generally speaking, yes, an emergency fund is necessary. What form it takes can vary, but it is a good idea to have an emergency fund.

An emergency fund can help you avoid high-interest debt, and helps reduce your stress.

After all, as I have mentioned earlier, life is full of surprises and many of them are sudden and not good.

By having that “cushion” can help you feel ready and calm. 

How Do You Go about Creating an Emergency Fund?

Total Your Expenses

First, determine your expenses. Look at three to six months’ worth of living costs and count on saving that much in a fund.

For example, if you normally spend $4,000 a month, multiply that by 3 and you would get $12,000. The $12,000 will be your target emergency fund.

The amount can help you keep your standard of living for a time if you lose your job, or it can cover a large expense such as car repairs or medical expenses.

Pro-Tip

My favorite way to keep track of our finances is by using Personal Capital. With Personal Capital, I can visualize our spending and savings, get insights into our cash flow, see the transactions we’re making, analyze our net worth, and more.

It is an absolutely FREE tool to use, and if you sign up through our link, you and I will get $20 each!

Determine Your Time Frame

Then determine how long it will take you to save that much and how much you have to take out of your paycheck each month to reach that goal.  

Once you’ve determined the amount you need to save and how long it will take to save it, it’s a good idea to change your mentality and put payments into the emergency fund before you pay for anything else. 

If you can do it by automatic deduction, go for it — see if you can have a portion of your paycheck taken out and put into a savings account.

Otherwise, make it a habit to put money in your savings first and foremost, and then take care of your other expenses after. 

Learn why you need emergency fund.

What If You Have Low Income?

Even if you have low income, you can set aside something each month. Try saving a percentage of your income, such as 5 or 10 percent.

It may take you longer, but it will accumulate. 

Does Emergency Fund Have to Be Huge?

In short, no. An emergency fund does not have to be massive – but it certainly should cover unexpected expenses.

Learn more about the emergency fund by checking out How To Create An Emergency Fund?

An Emergency Fund is a saving that will cover unexpected expenses that need to be taken care of immediately.

But, how about those expenses that are expected?

This type of expenses will be taken care of by your Sinking Funds.

Learn the difference between emergency funds and sinking funds.

What Is A Sinking Fund

Another type of savings that you should have is the Sinking Fund. Sinking Fund is a saving strategy in which you set aside a little amount each month to prepare for larger purchases in the future.

Why Do I Need A Sinking Fund?

You might be questioning the need for a sinking fund if you are already saving. I totally get it, however, your savings might not last long if you don’t know what you’re saving for.

You might not even know if you have enough.

By having a Sinking Fund, you will be:

Prepared

Your washer and dryer won’t last forever. Your furnace will have its hiccups. But it’s ok because you are prepared for it. 

Pay Cash

Your sinking fund is a collection of cash intended to pay for a specific future purchase. So when it’s time to use it, you will be able to pay cash.

No more swiping credit cards and be in debt. Although, I usually use my cards to earn rewards points and use the cash to pay off the balance.

Enjoy Your Purchase

When you have the fund to purchase an item or a vacation package, you will be able to enjoy it more because you know that you are not in debt by purchasing that item or package.

How Does Sinking Fund Work?

Starting a sinking fund is simple and easy.

Review Monthly Budget

Start by looking at your monthly budget and determine how much you can realistically save every single month.

Identify Annual Expenses

You will then evaluate your expenses and identify the expense that you pay annually, it can be an annual gym membership, car insurance, home insurance, etc.

Determine How Much To Save each Month

You will then take the annual amount and divide it into twelve months. And after knowing the amount you should be saving every month, you should work diligently on setting aside that amount every single month.

For example, we pay $900 on hour home insurance and we pay it annually. So, I would divide $900 by 12 which gives me $75.

I would then create a Home Insurance Sinking Fund and set aside $75 every month. When it comes due then I will have the full amount ready.

As for things that you would not know the amount, like home repair, vacation, children’s fund, etc, set aside any amount that you want as long as it will not mess up your monthly budget. 

If you only have $500 extra for savings in your monthly budget, stick to the $500.

Join the MWP community to get access to free printables, including a sinking fund tracker.

Sinking fund categories that you should have.

What Can Be Included In A Sinking Fund?

You can basically include ANYTHING in your sinking fund categories. However, make sure you have the following:

  • Home Repair Fund
  • Vacation Fund
  • Medical Expenses Fund
  • Car Repair Fund
  • Children’s Fund (if you have kids)
  • Pet Fund (if you have pets)

You can also add the following sinking fund categories:

  • Holiday Fund
  • Gift Fund
  • Gym Membership
  • Home Insurance
  • Car Insurance
  • Christmas Fund
  • Life Insurance
  • Clothes
  • Car Replacement
  • House Downpayment
  • Tuition

There you have it!

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Final Thoughts On Emergency Fund And Sinking Fund

Although emergency fund and sinking fund are both savings, the main difference rests on their purpose.

An emergency fund is for purchases that are UNEXPECTED and NOT SPECIFIC while sinking fund is for purchases that are EXPECTED and SPECIFIC.

You can keep your emergency fund in an interest-bearing account that is easily accessible and watch it grow. We keep ours with CITBank, which gives us a reasonable interest rate.

As for the sinking funds, you can keep them in one account but you need to keep track of each sinking fund.

I keep ours with Capital One 360 Savings, which allows us to have multiple savings account in one account.

Now that you have learned about Emergency Fund vs Sinking Fund, next up on the series is about the Best Budgeting Apps and Cash Envelopes.

Do you have an emergency fund and sinking fund yet?

If you haven’t yet, download the Master A Budget Workbook to practice what you will learn from this series.

Emergency Fund and Sinking Funds

Emergency Funds vs Sinking Funds (Master A Budget Series)

Budget Percentages And Categories For A Personal Budget (Master A Budget Series)

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Budget Categories

Welcome to Day 5 of the Master A Budget Series! Yesterday, we talked about Components of Budgeting; today, you will learn about budget percentages and categories for a personal budget.

Let’s dive in.

Now that you know about your income and expenses, you might be wondering what personal budget categories are you going to use. Also, how much of your total budget goes to each group.

Don’t worry; I got you.

Your budget needs budget categories and Dave Ramsey percentages, here are some tips on what you should include.

Budget Percentages For A Personal Budget

If you search on the internet about budget percentages, you will see that most of the results point to Dave Ramsey’s recommended budget percentages.

I, myself use Dave’s principles but I tweaked it a little to fit my family’s financial dynamics.

Dave Ramsey Budget Percentages

  • Saving: 10%
  • Giving: 10%
  • Food: 10-15%
  • Utilities: 5-10%
  • Housing: 25%
  • Transportation: 10%
  • Health: 5-10%
  • Insurance: 10-25%
  • Recreation: 5-10%
  • Personal Spending: 5-10%
  • Miscellaneous: 5-10%

It’s good to include enough detail on your budget to have a grasp on things, however, splitting your expenses into a bunch of categories will probably only frustrate you.

Moreover, it will require a lot more patience to use the above recommendations, especially for someone who is just learning how to budget. 

What Is The 50-20-30 Budget Rule?

If you do not want to complicate things, the 50-20-30 Rule is a simpler alternative.

Budget Percentages and Categories-50/20/30 Budget Rule

50% to Needs

Half of your income will go to areas that you cannot live without and that includes housing, food, transportation, utilities, and healthcare.

20% to Savings and Debt

The 20% of your income will be spent on funding your emergency fund, retirement, student loan payment, personal loans, and credit card payment.

30% to Wants

30% of your income will be spent on the things you want to do but you can live without, otherwise known as fun money. This includes vacations, dining out, entertainment, shopping trips, and other luxuries.

The 50-20-30 Budget Rule is best for those who are new to budgeting because it is easy and simple to follow. Once you get the hang of it then you can start going into more detailed budgeting.

Both of these budget percentages have their advantages and disadvantages. Consequently, they are not for everyone.

You still need to tweak them to fit your unique financial situation. Use them only as a guide. For example, if your financial goal is debt freedom, then you might focus more on paying off your debt rather than saving for a vacation.

You see, everyone’s financial situation is unique but the most important thing is to focus on your goal.

If you keep your eye on the prize, then you will know how to perfect your budget.

Here are the recommended budget categories and recommended budget percentages that you need to know.

Budget Categories For A Personal Budget

Let’s break down your expenses into monthly budget categories. Although it’s good to include enough details on your categories, splitting it into dozens of little categories will probably be too tedious.

Try to make your categories fairly general – “entertainment,” for example, is a more general category than “computer games, movies music, and DVDs” listed as separate categories. 

Here are the Budget Categories that you can include in your budget. Not all of them are applicable to you so only pick the ones that will work for your family.

I usually refer to my budget categories when I was doing the cash envelope budget system.

Income

  • Net Income/Paycheck
  • Extra Income
  • Bonus/Refund

Expenses

Housing

  • Rent/Mortgage
  • Renters/Homeowners Insurance
  • Property Tax
  • HOA  Fees
  • Home Maintenance
  • Home Improvements
  • Furniture/Décor
  • Household Items
  • Cleaning Supplies
  • Lawn & Garden
  • Security System
  • Cleaning Service

Utilities

  • Electric
  • Gas
  • Water
  • Sewer
  • Trash

Transportation

  • Car Payment
  • Insurance
  • Car Maintenance
  • Fuel

Food

  • Grocery
  • Restaurant
  • Warehouse Membership

Technology

  • Phone
  • Internet
  • Cable
  • Streaming Devices
  • Subscription

Health

  • Medical Expenses
  • Life Insurance
  • Gym Membership
  • Health Insurance

Personal Care

  • Clothing
  • Toiletries
  • Baby Items
  • Haircuts
  • Beauty

Pet

  • Food
  • Clothes
  • Accessories
  • Pet Insurance
  • Medical, Grooming
  • Boarding

Fun

  • Travel
  • Entertainment
  • Hobbies
  • Kid’s Activities
  • Holidays
  • Parties
  • Personal Spending Money

Giving

  • Charities
  • Church
  • Gifts

Saving

Debt

  • Credit Card
  • Student Loan
  • Personal Loan
  • IRS

Final Thoughts on Budget Percentages And Categories For A Personal Budget

Those are the budget categories and percentages that you can use to craft your budget. Remember, your financial situation is different from anybody else, so don’t be afraid to make adjustments so that it will align better with your financial goals.

Next up on the series is everything you need to know about Emergency Funds and Sinking Funds.

If you haven’t yet, download the Master A Budget Workbook to practice what you will learn from this series.

Did I miss any personal budget percentages or categories?

In order to have a good budget, you need budget categories and budget percentages, here are some tips.

Budget Percentages And Categories For A Personal Budget (Master A Budget Series)

Components Of Budgeting (Master A Budget Series)

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Income and Expenses

Learn what you need in creating a budget that works for you.

Welcome to Day 4 of the Master A Budget Series! Yesterday, we talked about the Budgeting Goals; today, you will learn about the Components of Budgeting which are Income and Expenses.

Let’s dive in.

When you have a budget, there are two key points that make up your budget, that is income and expenses. 

Let’s take a closer look. 

What Are The Components Of Budgeting

Income

The first key point and most important part of your budget is your income. Your income is what drives your budget; this is where it will all start.

Here are the types of income that you may receive every month. 

Gross Income

Gross income is the total amount of the wages you received before taxes or any other withholdings like social security, Medicare, etc.

Net Income

In contrast to gross income, Net income is the income after all deductions are taken out. This is usually referred to as your take-home pay.

Extra Income/Passive Income

Extra income is the income that you receive from your side hustles.

For the purpose of budgeting, we will only take into consideration the net income and extra income.

When it’s time to start writing the income part of your budget plan, there will be some estimating, no doubt; but make sure it’s estimation, not dreaming. 

The income area of your budget is not the place to write down ideals. 

To have an idea of how much net income is, simply take a look at your paycheck if you are salaried (meaning you have the same pay every month regardless of how much time you put in). 

But what if you have an irregular income? 

You would simply take a look at your net income over the last three months and estimate your average monthly income. 

Expenses

Your next key point is expenses. It simply denotes where your income is going; where are you spending your money on.

Expenses can be broken down into two types of expenses, fixed and variable. 

Fixed Expenses

Fixed expenses are the bills in which the amount does not change and that you expect them every month. This can be your rent, mortgage, student loan payment, car payment, cellphone bill, cable, water, electric, etc.

Although water, gas and electric bill varies every month, I still categorize it under fixed because I can request it to be billed even. Otherwise, they will be under variable expenses.

Variable Expenses

Variable expenses are bills that are not fixed and can be discretionary. This type of expenses includes food, pet supplies, clothing supplies, gifts, credit card payments, utility bills and etc.

As you break down your expenses into understandable categories and numbers, remember that charitable giving or any giving away of money should be also listed as an expenditure. 

Savings Expenses

I usually add this as the third type of expenses because if you are putting away after-tax money from your income towards your savings, then it is considered as an expenditure as well.

Or, if you are adding money to your sinking funds, it is also considered an expenditure. A sinking fund is a money set aside every month for the purpose of a future big purchase or vacation. We will talk more about sinking funds in the next part of the series.

Some Basic Principles

In budgeting, there are some principles that are considered basic. Here are some of them.

Wants vs Needs.

The question to ask yourself is, “Can I survive without this?”. This can be a hard one, but it’s vital for a budget to function properly. Beware of convincing yourself that a want is a need when it isn’t – you may just be trying to find an excuse to buy the item. 

Real needs are things like clothes, food, and shelter; but designer clothes, gourmet food, and a grand dwelling are more like wants!

Income vs Expenses

Your expenses should not exceed your income. You may find yourself surprised the first time you do a budget and discover that you actually don’t make enough money to cover your expenses. 

If you see this, you need to look back carefully at your income section and see if you can grow it through side hustles or by working overtime. 

You also need to examine your expenses, maybe you are spending too much in one area. Re-evaluate and trim your expenses as much as you can. Check out 101 Smartest Ways To Save Money Fast.

There you have it!

Knowing and evaluating your income and expenses is essential in setting up a budget that will work.

Is your income higher than your expenses?

Now that you learned about the components of budgeting, it’s time to learn everything you need to know about Budget Categories and Percentages.

If you haven’t yet, download the Master A Budget Workbook to practice what you will learn from this series.

Discover the components of budgeting that you should include in your budgeting

Components Of Budgeting (Master A Budget Series)

Budgeting Goals (Master A Budget Series)

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Budgeting Goals

Learn how creating budgeting goals can make you a successful budget.

Welcome to Day 3 of the Master A Budget Series! Yesterday, we talked about the Benefits of Budgeting; today, you will learn about Budgeting Goals, what they are, and how to set the perfect goals for your family finance.

Let’s dive in.

Budgeting goals are the reasons why you are budgeting.

Have you ever driven a car without a destination? Sounds crazy, right? That means wasting all your time and gas money for nothing. Or have you ever run a race with no medal or incentive at the end? I did, and I barely showed up because I was not motivated. 

When you do your budgeting without any budget goals, it is like driving a car with no destination or running a race with no incentive. You’ll never gonna get there because you are not motivated and there is no THERE.

As with any other aspects of your life, budgeting works best if you have goals.

Why Do You Need Budgeting Goals

Here are some reasons why you need to set not only budgeting goals but any goals in your life.

Goals Give You A Purpose

When you have a goal in life, it gives you a purpose. It gives you a reason to keep doing what you’re doing and strive harder so you can get there faster. Goals give you something to look forward to in the end.

Goals Keep You On Track

Having a goal keeps you on track by making you aware of how far away or how close you are to your goal. It keeps you focused on the steps you need to take to get you closer to the end goal.

Goals Give You Motivation

Life is not a bed of roses and definitely not a smooth road. You might be so pumped at the beginning of our journey but halfway, you might stumble and get stuck. And if you do not have a goal, you will stay down and stuck because you do not have the motivation to get back up and continue.

Goals Hold You Accountable

Having a goal will hold you accountable and will make you focus on tasks that will move you closer to achieving your goals. You’ll make sure that all the actions you are taking are necessary to hit your goals.

Be SMART With Your Budget Goals

SMART is an acronym, introduced by George T. Doran, that is widely used for goal setting.

  • Specific
  • Measurable
  • Attainable
  • Relevant
  • Time-Bound

Specific

When you set your goals, it should be specific. Instead of saying “I will be debt-free”, say, “I will pay off $30K in credit card debt”

Instead of saying, “I will save money”, say, “I will save $10K”.

Measurable

Your goals should be measurable. You should be able to measure how far or close you are to your goal. So if your goal is saving $10K, you should be able to gauge how far you are to your goal (e.g $500/$10K, 25% complete, etc).

Attainable/Achievable

All goals should be attainable but challenging enough to push you out of your comfort zone. If your goal is to pay off debt, do not set a goal to pay $100K in a year if you are in between jobs.

Likewise, if your goal is saving money, do not set a goal of $100K in a year if your left-over money after all expenses is $1000.

Setting a goal too high is a perfect ingredient for failure. It can discourage you and can bring a lot of frustrations.

Relevant

Be wise in setting a goal. The goals you choose should be those that bring a lot of impact on all areas of your life. 

Time-Bound

Lastly, your goals should be time-bound. Adding time on your goals will give you a sense of urgency. So for your saving goal, instead of saying, ‘I will save $10K”, say, “I will save $10K in 12 months”.

Have a Long and Short Term Goals

Long Term Goals

Long term goals are the ones you want to achieve in 1 year, five years, or 10 years. These can be your ultimate goals in life. Long term goals can be to retire early, fully-funded emergency fund, mortgage-free, etc.

These goals can be daunting because they see to be impossible to achieve. However, if you set short term goals along with these long term goals, they will be more realistic and achievable.

Short Term Goals

Short term goals are the bite-sized goals of your long term goals. For example, if your long term goal is “Save $20K for an emergency fund in 2 years”, your short term goal would be, “Save $833 per month” or, “Save $416 every paycheck”.

As you can see, the long term goal of $20K in 2 years was broken down into 24 months, which is more realistic.

Create A Vision Board

A vision board is a place where you put visuals that will keep you motivated on your journey. It can a picture of a house or a photo of the vacation destination. Anything that you envisioned your life to be once you reached your goals.

If you haven’t yet, download the Master A Budget Workbook to come up with your long and short term goals.

Write all your goals down. Putting them on paper is like putting them out there in the universe. They also become tangible.

There you have it!

Your budgeting goals can be to pay off debt, save money for retirement, save money for a vacation, save money for a house, etc.

By having a goal on the horizon, you will be motivated enough to start your budget and stick with it. And by applying the SMART method, you will reach your goals in no time.

Now that we’ve finished talking about the setting your Budgeting Goals, next up on the series is I’ll share with you the things you need to know about Income and Expenses.

What are your budgeting goals? Why are you budgeting?

Budgeting Goals

Budgeting Goals (Master A Budget Series)

20 Advantages of Budgeting

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Benefits of Budgeting

Welcome to Day 2 of the Master A Budget Series. Yesterday, you learned about the Signs That You Need A Budget; today I will share with you the Advantages of Budgeting.

So let’s dive in.

Curious why you need to budget? Here are the benefits of budgeting that you need to know.

Why Budget?

It’s embarrassing but I have to admit that before I knew about budgeting (before I got married), I had the most terrible misconception of what budgeting is.

I thought budgeting was only for those who do not make enough and do not know how to save.  

I thought I am saving money so I do not need to budget. WRONG.

There are so many benefits of budgeting that I didn’t know and I wished I had known earlier so that I could have started budgeting sooner.

A recent survey done on 1,000 respondents showed that 74% followed a budget and also 68% claimed that their financial situation improved after they followed a budget.

So if you are like me who misunderstood budgeting and has been pushing it to the side, read on. Do not make the same mistakes I did. The sooner you start your budget, the sooner you’ll get to financial independence.

Advantages of Budgeting

#1 Lets you know where your money is going.

When you have a budget in place, you will be tracking your expenses. By doing this, you will be aware of where every penny is going.

#2 Gives you control over your money.

Budgeting gives you the power to give every dollar a job. You can control how much you can spend on any of your budget categories.

#3 Reduces your Expenses.

If you do not have a budget, you might not even know how much you are spending on certain areas of your expenses. When we started budgeting, I was shocked to find out how much we were spending on eating out.

#3 Saves you Money.

When you have control over your money, you have the ability to reduce your expenses and save more money.

#4 Helps you set and track financial goals.

You can now set your financial goals because you can control your money. You can increase your savings, pay off your debt and reach your goals faster.

#5 Helps you achieve your goals sooner.

When you have a budget, you will know exactly how close or how far you are to your goals. This awareness will get you motivated to manage your money better so you could reach your goals faster.

#6 Lets you set priorities.

Budgeting has allowed me to prioritize our starter emergency fund before tackling our debt.

#7 Reduces your stress about money.

Knowing that your money is well allocated, you will be confident that you are prepared for anything.

#8 Pays off your debt faster.

If debt freedom is one of your financial goals, budgeting will help you save more money to pay off your debt.

#9 Allows you to enjoy your money.

By knowing how much you can afford, you will be able to enjoy your life and your money because you know that you will not be in debt.

#10 Prepares you for unexpected expenses.

Budgeting allows you to save for an emergency fund that can take care of unexpected expenses.

#11 Gives you peace of mind if your job is unstable.

When you have a budget, you will be able to save for 3-6 months worth of expenses. This saving will provide you a safety net if ever you lose your job.

#12 Allows you to invest more.

More savings mean more flexibility to invest more. You will be able to increase your investment.

#13 Organizes your spending.

Budgeting makes your expenses easier to understand and manage.

#14 Let’s you know what you can afford.

When you have a budget, you will be aware of how much money is left after all expenses are budgeted for. This will let you know what you can afford.

#15 Gives you a better understanding of your income and expenses.

Budgeting will give you a clearer picture of how much money is coming and how much is going out.

#16 Lets you plan for the future.

By having a budget, you will be able to build up savings that lets you plan for the future.

#17 Keeps you from living from paycheck to paycheck.

When you have a budget in place, you will be able to manage your money better. You will have a wiggle room for savings and for fun.

#18 Makes you feel like you just got a raise.

When you account your income and expenses on your budget sheet and you got left-over money after all expenses are budgeted for, you will feel like you just got a raise.

#19 Makes you afford things you want without using a credit card.

With your sinking funds, you will be able to pay cash for a big purchase or a vacation.

#20 Gives you more confidence when talking about money.

Now that you have control over your money, it will be easier for you to strike a conversation about money with your family.

There you have it!

Those are the benefits of personal budgeting that I wished I knew sooner. I hope you learned something from this part of the series.

Now that we’ve finished talking about the advantages of budgeting, next up on the series is I will share with you the importance of having Budgeting Goals.

If you haven’t yet, download the Master A Budget Workbook to practice what you will learn from this series.

Wondering what budgeting can do for you? Here are the advantages of budgeting that you need to know.

Advantages of Budgeting (Master A Budget Series)