Emergency Fund vs Sinking Fund - Do You Need it?

With such uncertainty currently due to the Covid-19 pandemic, it is so important to be financially prepared when they are emergency or unplanned expenses.

So it is so important for us to prepare emergency fund and sinking fund.

But many people are a bit confused about the difference.

Can we just prepare only one?

Emergency Fund vs Sinking Fund

What is Emergency Fund:

The name says it all. It can only be used during an emergency! However, we normally only use this if you lose your job. It is not to be used to buy a new gadget or to spend it on leisure. 

The common practice is to set aside about 3 to 6 months of monthly expenses.

The amount depends on the industry that you are in.

For those that work in the Oil & Gas industry, some even recommend setting aside 24 months of the emergency fund!

Anyway, if your monthly expenses are low enough, you can adjust the amount accordingly.

It is always good to keep your expenses low.

Do not overcommit to any monthly purchase unnecessarily.

What is Sinking Fund:

We all know occasionally we will have some "bad day" that will eventually happen to us.

I had a friend after he bought a new car, all four tires were being stolen within a week after he got the car!

That costs him RM250 x 4 = RM1,000.

With the sinking fund, that helped to settle the expenses to buy the new tires.

(I'm not sure whether his insurance covers that).

My practice is to prepare about RM10,000 of a sinking fund for any unforeseen expenses.

Do you have any emergency and sinking fund?

Happy Investing and Keep Safe Always! 😉