When you set up a sinking fund, you are basically saving up money to cover an upcoming expense. You may do this to purchase a new car, go on vacation, replace your furnace or repair your roof. An emergency fund is in place to cover the unexpected expenses that can happen. This could be an unexpected car repair, an unexpected medical bill or an emergency flight home to your parents.
You can set the funds up so that they exist in the same savings account, but it is a good idea to keep the amounts separate. You can do this on a sheet of notebook paper or in your budgeting software. This allows you to see how much you have set aside for each category, but it also keeps the money separate from your checking account and your daily transactions. You do want your emergency fund to be easily accessible, so that you can get the money quickly if you need to.
The longer you budget, the more you will see items that you should have a sinking fund for. For example, if you wear glasses, you buy them every year, so you should plan to save up for them every year. Similarly you replace your tires on your car every other year or so, and the first time, you may not have planned for it, but now you can see that you need to set aside money to cover the expenses. If you drive an older car, it is a good idea to go ahead and set aside money to cover the cost of future repairs on the care. Eventually you will be able to budget so well that you will only need to use your emergency fund, if you have lost your job or have a major catastrophe, otherwise you will use sinking funds to cover the purchases.
