You can manage your family finances the same way as big companies manage their looming debts — with a sinking fund. Think of it like this: Instead of trying to come up with a chunk of money when big expenses loom, contribute money to a sinking fund that will be used to pay specific expenses. It’s different than long-term savings or an emergency fund.
Your emergency fund should provide living expenses for three to six months if you lose your job or unexpected situations change your income. The key word is unexpected. A long-term savings account should cover long-term goals: retirement, the purchase of a home, or even a vacation home.
A sinking fund, meanwhile is for specific expenses that will occur at a specific time, according to Dave Ramsey. Things you know about. You know little Johnny is going to need braces in three years or in two years you will go on a big vacation. Open a specific savings account as a sinking fund, and every month contribute part of the amount you will need in three years. You could stash the money in your emergency fund or savings account, but using a sinking fund gives you a clear conscience that you can use the money and you have saved for this expense. You’ll be able to see exactly what you have saved toward the goal.
The most important thing is to be faithful to the fund. Decide how much you have to contribute to reach your goal and do it.