Emergency fund or sinking funds: which is right for you?

Financial buffers. Perhaps not the most exciting topic, but if you've ever found yourself in a situation where you unexpectedly needed a large amount of money, you know how important they are. Whether you're just starting to save or already have your finances in good order, it can be difficult to choose: should you build an emergency fund or invest in sinking funds?

Let's dive into this a bit, and who knows, you might find out what suits you better.

What is an emergency fund?

An emergency fund is a kind of financial superhero. It's there when things suddenly go wrong. Think of your washing machine stopping mid-cycle, a hefty dental bill, or—hopefully not—an unexpected layoff.

The idea is simple: you set aside a small amount of money that you only access when there's a real emergency. Think of it as your "just in case" savings account.

How much do you need in an emergency fund? That depends on your situation. Many experts recommend setting aside three to six months' worth of fixed expenses. That might sound like a lot of money (and it is), but it will give you tremendous peace of mind.

For example, if your fixed expenses are €2,000 per month, an emergency fund of €6,000 to €12,000 is ideal. If you have a partner with whom you share expenses, this amount may be lower, depending on your joint expenses.

Tip: with the month-in-advance savings bundle you can save a month in advance in a fun way

What are sinking funds

And then we have sinking funds. This might sound a bit vague, but it's essentially just a specific savings account for planned expenses. While an emergency fund is for unexpected things, sinking funds are for things you can already see coming.

Think of a vacation, Christmas gifts, your annual car insurance, or that new piece of furniture you really want. With sinking funds, you save specifically for these kinds of goals, so you don't have to pay a large sum all at once later.

How does it work? Suppose you know you want to plan a €1200 vacation in six months. You can set aside €200 each month. When the time comes, you'll have the money ready and waiting, and you won't have to dip into your emergency fund (or worse, your credit card).

Many people find it helpful to open separate savings accounts for different sinking funds, or they use savings challenges for cash stuffing. This helps them maintain an overview and gives them a good feeling when they see their savings grow.

Emergency fund: a must have

Let's face it: when something unexpected happens, you don't want to panic and pull out your credit card or try to borrow money from friends or family. That makes an emergency fund a truly basic necessity.

The biggest advantage of an emergency fund is the peace of mind it gives you. You know you'll always have something to fall back on, no matter what happens. But there are downsides, too.

A common criticism is that the money in your emergency fund "does nothing." It just sits there in a savings account and often earns little interest. Yet, that's precisely the goal: you want that money readily available. It's not meant for investing or growing, but to bail you out when you need it.

If you're just starting to save, building an emergency fund can seem daunting. But remember: you don't have to set aside thousands of euros right away. Start with a smaller goal, say €500, and work your way up from there.

By saving in installments you save up to reach your target amount

Control with sinking funds

Sinking funds are a great way to stay on top of your finances. It prevents you from panicking when your annual car insurance suddenly goes bankrupt, or when your vacation plans fall through because you have no budget.

The great thing about sinking funds is that they're flexible. You can tailor them to your life and priorities. Saving for a festival, a new bike, or even a tattoo? It's all possible.

The downside? You have to think and plan ahead. For some, that's a challenge. You can also get bogged down in creating too many different pots. If you have 15 sinking funds, it becomes difficult to keep track of everything.

Tip: Use a budget planner for maximum overview

What is more convenient for you?

Okay, now that you know what an emergency fund and sinking funds are, how do you choose which one is right for you?

The answer depends on your situation.

1. Do you not have any financial buffer at all?
   Then start an emergency fund. This is truly your foundation. Even a small amount of €500 can make a world of difference.

2. Do you already have an emergency fund?
   Great! Then you can focus on sinking funds. This makes saving more fun and purposeful.

3. How stable is your income?
   If your income is uncertain (for example, if you're a freelancer), a larger emergency fund is essential. Do you have a steady job and predictable expenses? Then you might be able to access sinking funds more quickly.

A combination of both often works best. First, ensure your emergency fund is well-stocked, and then start using sinking funds for planned expenses.

Practical tips

Here are some practical tips for building both an emergency fund and sinking funds:

• Automate your savings. Set up automatic transfers to your savings accounts. This way, you won't forget and you'll automatically build your savings.
• Use separate accounts. This helps you maintain an overview and prevents you from accidentally using money from your emergency fund for something that isn't urgent.
• Use a budget planner
• Keep updating your buffers. Costs change over time, so make sure you adjust your goals as needed.