What is the Difference Between Emergency Fund and Sinking Fund?

What Is an Emergency Fund?

What Is a Sinking Fund?

Difference Between Emergency Fund and Sinking Fund?

Unlike an emergency fund or savings account, a sinking fund is generated to meet a singular purpose. Mentioned below are the key differences between an emergency fund and a sinking fund:

Perspectives

Emergency Fund

Sinking Fund

Saving Goal

Emergency funds are saved to meet unforeseen expenses in the future.

In the case of sinking funds, a lump sum is saved for a scheduled future expense.

Time to Set It Up

It remains intact and fully funded until an unexpected expense arises.

It depends on the funds required to meet a particular future payment.

Who Avails Them

Emergency funds are mainly availed by individuals.

In the case of sinking funds, they are mainly availed by companies.

Liquidity

Emergency funds are more liquid than sinking funds.

Sinking funds are less liquid than emergency funds.

Target Amount

Emergency funds are usually around 3 to 5 times the monthly living expenses.

Depends mainly on the required amount of future expenditures.

Number of Funds

Number of funds is only one.

The number of funds can be more based on the organisation's savings goal.

How to Build an Emergency Fund?

What Are the Categories of an Emergency Fund?

How to Build a Sinking Fund?

What Are the Categories of a Sinking Fund?

FAQs About Emergency Fund Vs Sinking Fund

Is the sinking fund portion of cash? up-arrow

Sinking funds are cash set aside to be used afterwards to pay off a debt, bond, or preferred stock. It can also be utilised to fund an asset's purchase.

How can I compute a sinking fund? up-arrow

To compute a sinking fund, you will require the periodic contribution alongside the annualised interest rate, number of years, and number of expenses every year. After this, you can use a sinking fund calculator to proceed with the estimation.

What are the advantages of an emergency fund? up-arrow

Some of the noteworthy advantages of emergency funds are as follows:

  • Lessens stress levels
  • Avoids bad debt
  • Emboldens saving behaviour
  • Reduces retirement savings
  • Prevents lavish spending