Everyday money · General financial education

Sinking fund

Large bills you already know about (tyres, a move, insurance) are not a surprise. You can plan for them separately from an emergency fund.

In more detail

An emergency fund covers unexpected gaps. A planned pot builds towards a date. If you mix the two, the reserve looks full until the planned bill arrives, and is missing at the next surprise. Separate pots are a thinking aid, not a product.

Background

Planned spending has opportunity costs: money held for a date is not also a buffer or a long-term investment. Conversely, raiding an emergency fund is costly if expensive credit then fills the gap. The split is a planning assumption. Finmon does not say how large either pot should be.

An example

New tyres are due in eight months, about €600. Marking €75 a month for that leaves the emergency fund for genuine surprises.

A common misconception

Everything I save is an emergency fund.

Planned large bills are not an emergency. A separate pot keeps the buffer honest.

Source: Deutsche Bundesbank · Geld verstehen. Version 0.2.0. Finmon explains. It does not advise. Not investment, tax or legal advice.