What is the Difference Between an Emergency Fund And Savings?

savings vs emergency fund

Saving a part of your monthly income is essential for making big-ticket expenses. For this, you can put your money in either a savings account, emergency account, or both. Although somewhat similar, they have slight differences among them. Here are some points of similarity and differences between an emergency fund and a savings fund that you should know before deciding on your contributions.

What is an Emergency Fund?

An emergency fund acts as a financial safety net when in urgent need of money. It can also provide monetary support to individuals when their continuous cash inflow evaporates for any reason. 

One can build a contingency fund for various reasons like support during job loss, covering sudden medical expenses, vehicle repair, funding home needs, etc. Accordingly, you can determine the amount you must put in the fund monthly to cover the costs.

What is a Savings Fund?

A savings fund usually refers to a bank account where you can keep the money to earn interest. This can act as an additional source of income every month.

One can use this money for various purposes like paying EMIs, shopping, dining and other casual expenses. Furthermore, you can also set up auto pay from your savings account to ensure timely payment of premiums and EMIs.

What are the Differences Between Emergency Fund and Savings Fund?

The differences between a savings fund and an emergency fund are as follows:

Parameters

Emergency Fund

Savings Fund

Objective

To access money during an emergency.

Make payments as and when required.

End-Use Restriction

You should only use it when it is urgent.

You have the flexibility to use this money for everything.

Returns

You cannot earn returns unless you invest this money.

You can earn interest on the money you keep in an emergency fund.

Type of Savings

Goal-oriented savings to meet immediate fund needs.

You can use this money for a variety of purposes.

Amount to Be Kept

You should estimate the money according to your goal.

You can keep any amount that you need.

Forms

You can keep this money in cash or a separate savings account.

You can open a bank account to deposit your savings fund and reap its benefits.

Uses

You can use this fund during immediate fund needs.

You can pay for shopping, dining and other purposes.

Fund Transfers

It would be best not to transfer funds from your emergency fund.

You can anytime transfer funds from your savings fund.

Availability of Money

Available money when you are out of cash in the bank.

It offers money when you have a stable inflow of cash every month.
Nonetheless, there are several similarities as well between savings funds and emergency funds that you must be aware of.

What Are the Similarities Between Emergency Fund and Savings Fund?

Although savings and emergency funds are different, there are several similarities between them that you cannot ignore. These usually include the following:

  • Acts as a Cash Reserve: Both funds serve as cash reserves so that you can get money as and when needed. This can help you in staying worry-free about monetary emergencies.

  • Can be Used for Wealth Creation: You can invest the money in an emergency fund and savings fund in various schemes. This can ensure that you get sumptuous returns from your investments.

Emergency and savings funds can act as wise choices for parking your funds. However, due to a slight difference in their functioning, it becomes mandatory to first determine your savings goals. Accordingly, you should proceed with depositing your money in these accounts.

FAQs About Emergency Fund and Savings Fund

How much money should you save in your emergency fund?

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You should save according to the goals of an emergency fund. However, ideally, you should save an amount equivalent to 3 to 6 months' living expenses. This will ensure you can live freely even if your monthly income source vanishes.

How much time does it take to build an emergency fund?

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Ideally, building an emergency fund should take about 6 to 18 months. Hence, accordingly, you should plan your monthly contribution to this fund. To ease the process, you can also frame a budget and adhere to it.

Where can you put your emergency fund money?

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There are two places where you can put your emergency fund money. The first is in a separate savings bank account that you will not access unless you need immediate funds. Apart from this, you can also keep the emergency fund money as cash in your home.

What are the advantages of putting money in a savings account?

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You can use the money to meet your daily expenses. Also, you can keep the money in this account over the long term to plan vacations and high-ticket purchases. In addition to this, you can also earn interest from your savings account, which can earn you extra money.

What are the disadvantages of putting money in a savings account?

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Banks often set a limitation on the frequency of withdrawal from your savings account. Furthermore, keeping a minimum amount in your bank becomes mandatory to avoid paying a penalty.

Disclaimer

  • This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
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