What Is The Difference Between An Emergency Fund And A Savings Account
Yesterday I talked about how to save $1000 in one month. That is money for your emergency fund and even though it is recommended that you have at least $1000 in an emergency fund, I think a more realistic number is $2500. Pricing for everything is going up including how much emergencies cost.
What is the difference between an emergency fund and a savings account?
Well first of all, I do firmly recommend you have two separate savings accounts in your credit union, I like credit unions because the normally don’t charge fees to hold your money, but that is a topic for another post. As I was saying, have two separate savings accounts, one for your emergency fund, one for savngs.
So what is an emergency and when should you dip into your emergency fund? Well, most will agree that an emergency is something that is unexpected, say a trip to the emergency room due to something like an appendicitis. That is an emergency, and even though no one wants an emergency to happy, the time to plan for one is when life is going well.
Your emergency fund should hold funds to handle things like:
- Emergency room visits
- Insurance deductibles for medical, car and homeowners
- Car repairs (not general maintenance, this does not include oil changes, brakes etc, this is actual break downs)
- Job layoff, you still need to keep the lights on, eat and pay your mortgage or rent
- Sudden major issue with home like pipe bursts and you need to pay for water cleanup and can’t wait for your homeowners insurance check, but once your get the check back to the emergency fund it goes.
Your savings account should hold funds for things like:
- Replacing appliances in the home
- Home repairs, roof, windows/doors, plumbing, etc.
- Funerals, some may thing that is an emergency, however, there are two things in life that are guaranteed death and taxes. There will come a time when an out of town friend or relative will pass away and you will want to attend the funeral, start saving for that now.
- Personal funerals, not to focus on death but those close to us will also die at some point, I don’t recommend paying for a funeral a head of time, but do recommend having the conversation with loved ones and planning for the arrangements and saving for those costs a head of time.
- Car replacement
- Holidays & gifts
Your emergency fund is like your own personal insurance policy. You don’t touch it until you have an urgent emergency, a sale on shoes is not an urgent emergency, it is a want that you should have been saving for.
A savings account is for your wants and needs, like the shoes that go on sale.
If you have to pull money out of your emergency fund, then your first priority, once the emergency has passed, is the build that fund back up to the level that meets your family’s needs. Even if that means not putting money in savings for a month.
If you decide to pull money from your savings, I highly recommend paying it back to yourself with interest. If you pull out $1000 to go on a quick trip, save the $1000 back plus 10%, so you reward yourself with an additional $100 for saving money.
Yes, all this sounds easy to do if you have money, which you would have if you didn’t have debt. Ouch! Yep, that stung didn’t it, but it is true. Debt is holding you down from living free. Future posts on that are coming. If you want to learn more about savings and living debt free, I highly recommend you read “The Total Money Makeover“.
Let me know what you think below on emergency funds and savings accounts and post your comments below, what you have to say may help someone else as well.