Life happens, and we’re not always prepared for it financially. That’s why it’s important to keep an emergency fund as well as a savings account – and to know the difference between the two. If you’ve ever wondered what the difference is between an emergency fund and savings, read on to learn more about saving for the unexpected!
What is an Emergency Funds Account?
An emergency fund is an account into which you deposit a sum of money earmarked for major, unexpected expenses. These might include car repairs, unexpected medical expenses, home renovations caused by a fire or a flood, or unemployment.
Ideally, your emergency fund should be separate from your other savings, and you shouldn’t withdraw from it unless absolutely necessary. You should aim to cover at least a couple of months’ worth of essential expenses like rent, food, and utilities before you stop making deposits into this account.
What is a Savings Account?
Where checking accounts are intended for paying bills, savings accounts allow you to deposit money and get paid interest on it. Savings accounts let you deposit money as often as you wish, and make occasional withdrawals. You can do it by visiting your bank, withdrawing money from an ATM, moving money from one account to another by using online banking, or making payments via a debit card or e-Transfer.
Savings accounts are not intended to be used for day-to-day expenses. They are not emergency funds; they are goal-oriented accounts. That’s the main difference between an emergency fund and a savings account.
A savings account is normally a general account where you save for several purposes. However, you might also have several different savings accounts opened that are designated for big-ticket items like a house or renovations, and then another account earmarked for Christmas gifts, college education, vacation, and/or retirement. Separating your finances can help you save with more intention and help you visualize better where all your money is going.
There are regulations and rules for every savings account. This includes the number of allowed monthly transactions, the minimum amount of cash that must remain in the account, the number of transfers allowed, etc. Be sure to check with your financial institution about the rules regarding your savings account.
With most savings accounts, you can deposit money whenever you want. This can be done at any bank branch, at an ATM, online, via email, or through a money transfer.
There are so many different kinds of savings accounts that it’s difficult to choose which type. These types of accounts might include a business savings account, a youth savings account, a seniors’ savings account, a registered savings account, a registered retirement savings account, a tax-free savings account, or you can create your own customized savings account.
These accounts also don’t earn as much interest as a GIC (guaranteed investment certificate), a stock, or a bond. Therefore, they are not necessarily intended for long-term investments.
How Does an Emergency Fund Differ from a Savings Account?
An emergency fund is actually a special savings account. It should be used only for those situations deemed family or household emergencies. The main difference between an emergency fund and a savings account is what you use the funds for. Savings should be something you expect to spend on, something you are saving towards. Your emergency fund should be something you don’t intend to spend unless absolutely necessary.
How Much Should be in the Emergency Fund?
Financial experts suggest that your emergency fund has no less than the amount to cover three months of basic living expenses. Six months of living expenses is a better cushion.
RateHub.ca explains how much to set aside.
Once that amount is in your emergency fund, it is not necessary to add more each month.
(Source: Emergency Fund Calculator + How to Build One Up • Parent Portfolio)
Can You Have Too Much in an Emergency Account?
BankRate.com contends that you can, indeed, have too much in an emergency fund.
Use this as a good measuring stick. If you have more than enough to cover six months of basic living expenses in your emergency account, then it is time to consider investing the money.
If you are so focused on your emergency fund that you aren’t saving for other things, it may be time to reassess your savings goals.
If you don’t have enough to cover basic living costs each month, then you might need to hold off on adding to your emergency fund until you can afford it.
How much is too much? It depends on your ability to save. It also depends on your comfort level. Consider what emergencies your family might face. Then, decide if your “rainy day” fund can cover those imagined crises. If you are worried that it cannot, you need to increase your emergency fund.
How Do You Budget for Savings?
One of the necessities for having healthy savings or emergency funds is budgeting. To have money to set aside every month, you need to know what your fixed expenses are each month. Once you know how much you need to cover the essentials like food, rent, utilities, and transportation, you’ll know how much you have left over to put into your savings or emergency fund.
If you’ve never had a budget before, you might find it helpful to use an app to track your expenses. Budgeting apps can break down your expenses automatically to show you where you spend the most, and where you can afford to cut back. If you find yourself overspending on nonessential purchases like morning coffee or food delivery, you can adjust accordingly so that you’re funding your savings and emergency accounts in line with your goals.
Why Open a Savings Account?
Savings accounts pay interest where most checking accounts do not. If you have money you wish to set aside for special occasions, a savings account earmarked for that purpose is a good way to save for a vacation, college, retirement, or a new vehicle.
While savings accounts pay only a little interest, this is a no-risk income, unlike stocks or bonds. Putting your money into savings can help you earn some extra, even if it’s not much.
Advantages and Disadvantages to Savings Accounts
Savings accounts allow you to set aside money each month for purchases such as Christmas gifts, a vacation, retirement, or a college fund for your children.
Using your savings account, you can perform many transactions, including:
- Making deposits
- Making withdrawals inside the bank or at an ATM
- Using a debit card to purchase items
- Paying bills
- Transferring funds
- E-mail transfers to individuals or businesses
Cons of using your savings account:
- While savings accounts pay some interest, it is not a significant amount
- Possible limits on how many accounts you can have
Interest in a savings account is taxable. Often, the interest paid does not keep pace with the rate of inflation.
Is an Emergency Fund a Good Idea?
In every household, things happen. Appliances break; the car needs new tires; your child breaks their arm; the roof is leaking.
An emergency only becomes a crisis when there are no allocated funds in your budget for medical supplies or that new roof. If you’re prepared, it’s easier to weather these unexpected events.
The downside is that savings accounts—emergency and otherwise—don’t keep pace with inflation. This means that an emergency fund is a money-losing proposition. But what are the alternatives?
Budgeting Your Income
Once people become wage earners, they should start to budget their income, so bills are paid, savings are set aside for projected purchases, an account is established for unexpected emergencies, and a retirement fund is created.
Most earners find this easiest to set up and continue if they have separate accounts for paying the bills, saving for big-ticket items like a house or a car, and putting money aside for retirement and emergencies. Some even open accounts earmarked for vacations, college for their kids, Christmas gifts, and/or home business. The Marygold & Co. app can be a helpful budgeting tool to keep your savings accounts organized and your financial goals clear.
What is a Money Pool?
A Money Pool is an organized way to create various accounts and earn interest on them. This offers banking clients the ability to connect their accounts and customize their savings options.
Marygold & Co offers unlimited savings and investment money pools as an alternative to traditional savings accounts. Money pools are an easy way to save, budget or invest your earnings towards your goals, including emergency funds and vacations. With the Marygold & Co. app, you can open an unlimited number of money pools so that your financial goals stay organized, and you have a clear idea of where your money is going.
Keeping your emergency fund separate from your savings using the Marygold & Co. money pools can help you keep track of those individual goals more clearly and effectively, which is key for saving.
Start saving towards your future today! Saving and starting your emergency fund doesn’t have to be hard or scary if you’re prepared to devote just a little bit of time and thought to it. When you keep those funds separate, you’ll be able to watch your money grow!
Disclosures
This content is intended solely for providing information and should not be interpreted as financial, legal, or tax counsel. It is strongly advised that you seek guidance from your personal financial, legal, and tax consultants before participating in any financial transaction. Please be aware that the information, including hypothetical financial forecasts, might not account for taxes, fees, or other variables that could significantly influence potential results. This material is not to be regarded as an offer or suggestion to purchase or sell securities. While we believe that the information and sources are accurate, Marygold & Co. cannot assure the accuracy or comprehensiveness of the information and sources provided here, and we are not obligated to update this information. For further details about Marygold & Co., please visit our website.