Emergency Fund vs. Sinking Funds: What's the Difference?
At Flow State Financials, we believe in creating calm, clear systems that help you feel confident and in control of your money. Two tools that can make a world of difference in your financial flow are your emergency fund and sinking funds. While they’re both savings strategies, they serve different purposes — and understanding how to use them can help you stay prepared and at ease.
What Is an Emergency Fund?
Your emergency fund is your financial safety net. It’s money set aside for unexpected expenses that you can’t predict — like medical emergencies, car repairs, or sudden job loss. Think of it as a buffer between you and financial stress.
Benefits of an Emergency Fund:
Provides peace of mind in uncertain moments
Keeps you from relying on credit cards or high-interest debt
Allows you to make decisions from a place of calm rather than panic
How Much to Save: A common rule of thumb is to save 3–6 months’ worth of essential living expenses. If you’re self-employed or have irregular income, aim for the higher end of that range. In times of economic uncertainty, you may want to increase this as well.
Where to Keep It: A high-yield savings account is a great home for your emergency fund — easily accessible, separate from everyday checking, and earning a little interest while it sits. Ally Bank is our personal favorite (YouTube walkthrough here!)
What Are Sinking Funds?
Sinking funds are savings accounts with a purpose. These are dedicated savings buckets for expenses you can anticipate — like holiday gifts, annual insurance premiums, vacations, or car registration fees. Instead of scrambling when these expenses come due, you’ll already have the money set aside.
Benefits of Sinking Funds:
Keeps big expenses from disrupting your monthly budget
Helps you avoid debt for predictable costs
Allows you to plan ahead with confidence and clarity
How to Set Them Up:
List upcoming expenses or savings goals
Estimate the total amount needed
Divide that amount by the number of months until you need the funds
Contribute that amount each month into a dedicated account or sub-account
For example, if you want to set aside $1,200 for a vacation 12 months from now, simply save $100 each month.
Emergency Fund vs. Sinking Funds — Key Differences
Emergency fund: For the unexpected, true emergencies only
Sinking funds: For planned, predictable expenses
Both are essential, and they work best together. Your emergency fund keeps you protected from surprise expenses, while your sinking funds help you avoid those "I forgot about this bill!" moments.
Managing Them in Flow State
Review your emergency fund quarterly and top up if needed
Create a sinking funds tracker (we have a free one for you!) to make contributions automatic and effortless
Periodically review and adjust sinking fund categories as life changes
A Final Reminder
If you’re thinking about these systems, you’re already on the right track. Every dollar you intentionally set aside brings more peace and clarity to your financial life. It’s not about perfection — it’s about progress, preparation, and building a financial flow that supports the life you want.
Looking for additional guidance? Download our free Personal Finance Tracker, and check out our video walkthrough on YouTube. We’re always rooting you on!