Emergency Fund vs Savings

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. Here we explain the difference between an emergency fund vs savings.

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.

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 and withdraw money as often as you wish. You can do it through visiting your bank, at an ATM, move money from one account to another by using online banking, or make 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 vs savings accounts.

A savings account is normally a general account where you save for several purposes. However, you might also have several different savings accounts opened which 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.

There are regulations and rules with 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.

With most savings accounts, you can deposit and withdraw money whenever you want. This can be done at any bank branch, at an ATM, online, via email, or through money transfer.

There are so many different kinds of savings accounts that it’s difficult to choose which type. These might include: business savings account, youth savings account, seniors’ savings account, registered savings account, registered retirement savings account, or 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, 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 vs savings is what you use the funds in each account for. Savings should be something you expect to spend on, something you are saving towards.

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.

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 in places like stocks, bonds, or high-yielding GICs.

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 feel worried that it cannot, you need to increase your emergency fund.

Why Open a Savings Account?

Savings accounts pay interest where 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.

Advantages and Disadvantages to Savings Accounts

Savings accounts allow you to set aside money each month for purchases such as Christmas gifts or 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 significant

Interest on 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; little Cindy broke her 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.

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?

Marygold & Co. Money Pools

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 is easiest to set up and continue if they have separate accounts for paying the bill, 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.

What is a Money Pool?

It 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.

Starting soon, Marygold & Co. will release its Money Pool innovation. Clients will be able to create multiple, FDIC-insured accounts which will help meet their budgeting goals and earn interest.

With a Marygold & Co. Spend Now Account, you can manage your money with introspective account notifications, automatic custom savings features, early payday perks, customized security features, and more, without worrying about paying ridiculous hidden fees.

For more information about Marygold & Co. Money Pool savings accounts and the app that supports your customized goals and saving options, you can read more about money pools on our blog.