The Difference Between An Emergency Fund & A Savings Account

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Here on this little internet space you probably have heard me talk a lot about building a savings account and building an emergency fund. Often times I talk about building these up interchangeably and I feel like it may be confusing which one does which and which one you should start first.

So today I wanted to take some time and specifically go through both types of accounts and explain the purpose for each one, my thoughts on both of them and which you should be focusing on first.

Let’s dive in!

 

The Difference Between An Emergency Fund & A Savings Account

What Is An Emergency Fund?

This money is only for, you guessed it emergencies.

This is not an amount of money you are saving for a new computer, new phone, shopping spree at the mall, or your next vacation. This is for when you get a flat tire, a doctor bill, car repair or any unexpected expense that comes up.

Titled the “emergency fund” it should be used in a situation where you need money for an immediate and important reason. An emergency fund is not for an emergency sale someone is having, these are still necessary expenses like in your budget, these are just unexpected necessary expenses.

 

How much money should you have in an emergency fund?

For starters I’d say between $500-$1000. (Though adding a little more later on only gives you more peace of mind.) This will ensure most of your average unexpected expenses that come up will be covered. Once you’re at $1000 you can start putting your efforts towards an overall savings account (unless you have debt to pay off).

 

What Is A Savings Account?

Your savings account can be used for multiple different things. Unlike the emergency fund that is only for emergencies, this money can be used for emergencies if need be, but it can also be used for other things. (Kind of like how a square can be a rectangle but a rectangle can’t be a square.)

Overall your savings account may have a main goal like saving for a new car or a vacation. For us our savings account’s main goal is for a downpayment on a house. That is what we are ultimately overall saving for and why we make sure there is money going into that account every month.

But my husband and I also use our savings account as a catch all for all the money we don’t spend. Within our budget we don’t have an every month category for “extra things” so if we decide to spend any money outside of our budget it has to be agreed on by both of us and if it is it comes out of our savings account as an “extra expense”.

For instance, our 5 year anniversary is coming up and we are thinking of going on an overnight stay somewhere to celebrate. If we do this then we’ll take that money out of our savings account to pay for it.

For us, we don’t have two different accounts for Emergency Fund and our Savings Account. We just have one savings and we never let it get below that Emergency Fund level. So for example when we had to have a car repair done recently, the money came out of that account.

Even though we take out of it sometimes it still grows a lot each month because we are always putting more into this account as its main purpose is to be a downpayment.

 

How much money should I have in a savings account?

I recommend getting your savings up there quite a bit. I’ve heard it said to have 3-6 months of expenses saved in case something were to happen. I think this is a good rule of thumb.

Overall, having a emergency fund keeps you protected and having a savings account gives you options and freedom.

We spend less every month so that we can have the options to spend on things we’d like when they come up (like a short getaway) while still working towards our goal of a down payment.

 

It is so worth it to me to have peace of mind (emergency fund), reach our goals (down payment from our savings account) and still have options to do other things while we save (a short getaway from our savings account).

I hope this helps give you an idea of how you can best use these two accounts for your situation. I promise you, taking the time now to sort this out will give you so much peace and freedom in the future!

Lydia

BudgetingLydia Lois