I love the fact that so many people around me are striving to be financially fit and fabulous! Improving their credit scores, increasing their savings accounts, and becoming first time home buyers! In that spirit, a friend recently asked me what is the difference between an Emergency Fund and a Savings Account? In this post, we will dissect emergency funds and savings accounts.
What is an Emergency Fund?
An emergency fund is 3-6 months of expenses set aside in the event of a job loss, car problems, a medical emergency, or other unexpected financial situations. An emergency fund should be kept in a liquid bank account like a savings account that is easy to access in the event of a financial emergency. For more information regarding emergency funds check out 5 Reasons you Need an Emergency Fund and Steps to Starting an Emergency Fund.
What is a Savings Account?
A savings account is an account opened at a bank (brick and mortar or online) or other deposit institution which earns interest. Cash kept in a savings account is typically less accessible than money kept in a checking account. In an effort to encourage saving, the Federal Reserve limits the number of withdrawals that can be taken from a savings account to six per month.
In essence, an emergency fund is just one type of savings account that is “earmarked” or reserved for financial emergencies. To ensure your emergency fund is only used during financial emergencies, keep it separate from your general savings or checking account. By keeping your emergency fund separate from your general savings, you can avoid dipping into your emergency fund for concert tickets or a cheap flight!
Do you have a savings account or an emergency fund? Do you choose to keep them within one account or split them into separate accounts?
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