How Is an Emergency Fund Different from a Savings Account?

An emergency fund protects you when you face unexpected expenses. Conversely, a savings account helps you attain your financial goals.

Understanding the differences between an emergency fund and a savings account demonstrates the importance of funding both. Because each serves a different purpose, having both can help you stay financially secure while reaching your goals.

Emergency Fund vs. Savings Account

• Emergency Fund: An emergency fund is your financial safety net. This money is reserved for unplanned expenses, such as car repairs, medical bills, or job loss, that can affect your ability to pay your bills and reach your financial goals. You should be able to access the funds as needed.

• Savings Account: A savings account is your financial goals fund. This money is set aside for planned expenses, such as going on vacation, buying a car, or purchasing a home. You can leave the money to grow over time while working toward a goal.

What Is an Emergency Fund?

An emergency fund is money set aside for financial emergencies you can’t plan for:

• Major car repairs

• Medical expenses

• Urgent home repairs  

• Sudden job loss

An emergency fund should be easily accessible and without withdrawal penalties. A money market account can be a good place to keep the funds.

How Much Should You Save in an Emergency Fund? 

Financial experts recommend keeping at least 3-6 months’ worth of essential expenses in your emergency fund. If this amount sounds overwhelming, start small and work your way up. Even having $500 to $1,000 can make a huge difference in an emergency.

What Is a Savings Account?

A savings account is where you keep money for planned expenses or future goals, such as:

• A vacation

• A car

• Holiday shopping

• A down payment on a home

How Much Should You Have in a Savings Account? 

The amount in your savings account depends on your goals. For instance, if you’re saving for a vacation, research how much the trip might cost and work toward this amount. Or, if you’re saving for a down payment on a home, research the home prices, closing costs, and related expenses, then set a relevant goal.

Why You Need an Emergency Fund and Savings Account

Having both an emergency fund and a savings account prepares you for anything. Without an emergency fund, you might end up dipping into your savings when unexpected expenses arise, taking you off track from your goals.

For instance, say you’re saving for a vacation, and your car breaks down. If you don’t have an emergency fund, you might have to dip into your vacation savings and delay your trip. Conversely, if you have an emergency fund, you can pay for the car repairs without touching your vacation money.

Tips to Begin Building an Emergency Fund and Savings Account

The following steps can help you start building an emergency fund and savings account:

1. Set up separate accounts: Keep your emergency fund and savings account separate, so you’re not tempted to spend your emergency money on non-essentials.

2. Automate your savings: Set up automatic transfers from your checking account to both funds each month.

3. Start small: If saving three months’ worth of expenses feels impossible, start with $500 in your emergency fund and build from there.

4. Prioritize your emergency fund: Ensure you have a solid emergency cushion before focusing on long-term savings.

*This information is for educational purposes only.

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