Should I Have a Savings Account and an Emergency Fund?

Do you know the difference between a savings account and an emergency fund? Although they are similar, they serve different purposes:

• A savings account is for reaching goals, such as purchasing a car, taking a vacation, or putting a down payment on a home.

• An emergency fund is for covering unexpected expenses, such as a car or home repair.

Whereas a savings account is for planned spending, an emergency fund is for surprise expenses. Having both accounts helps you stay on track with your financial goals.

Purpose of a Savings Account

Keeping money in a savings account reserves it for a specific purpose. Drawing from these funds helps you avoid unplanned debt.

The following expenses might be paid for with a savings account:

• Insurance

• Planned car maintenance

• Car registration

• Memberships

• Vet bills

• School shopping

• Holiday spending

• Appliance repair

• Regular home maintenance

• Property taxes

• Big-ticket purchases

Purpose of an Emergency Fund

Keeping money in an emergency fund helps cover unplanned expenses. Drawing from these funds prevents you from accruing additional debt.

The following expenses might be paid for with an emergency fund:

• Car repairs

• Major home repairs

• Illness

• Family emergencies

• Unplanned moving expenses

• Job loss

• Divorce

• Natural disaster

Consider saving at least 3 to 6 months of expenses in your emergency fund. Start small, such as with $25 per month, and work your way up if needed.

Start Building Your Savings Account and Emergency Fund Today

Growing your savings account and emergency fund takes time.  You might need to realign your spending plan to keep more income to reach your goals and cover unplanned expenses.   Proactively saving for planned and unplanned expenses protects you from being reactive when bills arrive.

These tips can help you build your savings account and emergency fund:

• Start small: Begin by saving a small amount weekly, such as $10, to build your savings account, and 10% of your monthly earnings to build your emergency fund.

• Automate your savings: Set up automatic transfers to your savings account and emergency fund. Adding to your accounts without thinking about it reduces the temptation to spend the funds elsewhere.

• Manage your financial windfalls: Consider dividing bonuses, tax refunds, and other unexpected funds between your savings account and emergency fund.

*This information is for educational purposes only.

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