A quick guide to savings, sinking funds and handling emergencies

So let's be real for a second. Sinking funds are not the most exciting sounding topic in the whole world. I mean just the phrase "sinking funds" sounds like the worst. But they are important. Trust me. So let's talk about them. In fact I got a question from a reader about them recently. If you don't know what a sinking fund is I explain it all here

When you save sinking funds, do you put them in separate accounts or one?
What do you do if something comes up, like, you ran over something on the road and need new tires, but don't have enough money in the car sinking fund? Do you borrow from other sinking funds?

Those are very good questions. Let me first tell you how we handle our sinking funds. A lot of people will have multiple sinking funds in multiple accounts for multiple different things. Jason and I tried that. We tried to have multiple sinking funds and it was like my brain exploded. I can't handle it.

We have broken up our savings into four categories.

1. One is our big 3-6 months emergency fund. We have a threshold that we don't move out of. Our savings will not dip below that because that's money that we need to live off of if something happens to Jason's job (although I work and we also have that income coming in). Or if something horrible happened to our children. That's just untouchable.

2. Then we have our emergency fund. Like, I-ran-over-something-on-the-road emergency fund.

3. We have fun stuff savings, like for vacations, holidays and outings. 

4. And then we have our sinking fund or special projects, as I like to call it.

But we choose to only focus on one big thing at a time. So we don't have multiple sinking funds. We just have a list of all the things that we want to accomplish, and then we pick one that's the most important and the most pressing. And we save for that.

Last year we focused on our roof. We saved that money in six months. It was hard, but we did it. And that was on top of our regular savings goal.

Now, we have another home improvement project that, while not pressing, is something that we definitely need to get out of the way. 

And then after that, we need to buy a car because I don't want to cram three car seats in the back of a car. 

So we don't have multiple sinking funds and multiple accounts. In fact, all of our savings just stays in one place and we just know the breakdown. We don't need to have it in multiple spots.

Some people do; they need to have their money in multiple places. And that's fine. It's your money and you need to handle it the way that best suits your needs.

So if you know that you can't trust yourself not to take money out of your savings account, put it in a separate bank. Or if you get confused when you have multiple funds in one account, you just have multiple accounts. That's just not how my little brain works.

Emergencies vs. sinking funds

The next part of her question was if you ran over something on the road and you need to get your car fixed, and you haven't money in your car fund.

I think that she's coming from experience and, girl, I have been there. Last week, I hit someone's garbage can and knocked my side mirror off. I was only going, like, 35 miles an hour, but boom! My side mirror came clean off my car. And I didn't think a side mirror would be that expensive. It was.

So if you ran over something on the road, punctured your tire and you need your tire replaced, or something and you need to have your car fixed, that money would really need to come out of your emergency fund. Because you need your car to get to work. That's an emergency.

If you have an immediate, pressing need, that money doesn't necessarily need to come out of a car fund. It would come out of your emergency fund.

Do you borrow from other sinking funds?

I just don't like to borrow money from savings. I feel like that's kind of robbing your future. However, if you're in a situation where you need the money, you need the money. And it's better to pull from savings if it means avoiding debt, but if pulling money out of savings becomes habitual then you need to reassess your budget.