What is a sinking fund and how is it different from an emergency fund?

A sinking fund is money you set aside a little at a time for a known, planned future expense – a $1,200 annual insurance premium, $900 in holiday gifts, new tires, a vacation. You divide the total by the months until you need it and save that amount monthly, so the bill is already covered when it arrives. An emergency fund, by contrast, is for the unknown and unwelcome: a job loss, an ER visit, a furnace dying. Keeping them separate stops you from raiding your safety net for predictable costs and then feeling 'surprised' every December. Many people run several named sinking funds inside one high-yield savings account. Map out your irregular annual expenses, then set up automatic monthly transfers so each fund fills itself.