Difference between Emergency Fund and Savings
Experts say that you should have both savings and emergency funds. But can we truly say that we know the difference between the two when most people have a singular bank account where they store and take from their daily allowances, monthly expenses, sudden expenses, and savings?
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What are emergency funds and why is it important?
Also known as rainy day funds, an emergency fund is an easily accessible and liquid account, with a significant amount of money. You set aside this amount for a “rainy day” or for major financial changes like a drop or loss of income due to a global pandemic.
How much you’ll need in your emergency fund will depend on your income and life situation. However, as a standard, experts suggest between three to six months’ worth of expenses in your emergency fund account. This should be a great help in giving you financial relief while you recover from one of life’s many difficulties.
Difference between emergency funds and savings
Where people get confused is that, in the Philippines, most people set both their savings and emergency funds in a savings account in the bank. What differentiates the two is the purpose behind the fund.
Savings are the funds you set aside for a specific goal. It can be anything as personal and short term as saving up for a vacation, as big as saving up for a downpayment on a home or vehicle, or even as long term as saving up for retirement.
Emergency funds, on the other hand, are liquid accounts because they provide you a cash cushion for high, unexpected costs or major financial changes like job loss, calamities, sudden major medical emergencies, or even death in the family. The goal of having an emergency fund is to support you as you try to recover from these changes, while keeping you from maxing out your credit cards or borrowing money.
Why should I have emergency funds?
Having emergency funds can help give you a sense of purpose for your finances. It helps you get in the habit of saving and also avoid overspending. This is important because self-control is a valuable skill to have . You’d also be surprised that having money set aside under your name also affords you benefits like having an easier time acquiring bigger loans with lower interest rates.
But perhaps the most practical concept behind starting or maintaining emergency funds — and even savings — is that it’s never a bad idea to have a little bit of money tucked away for a rainy day. Even during a financially difficult time, having that cash cushion helps you avoid debt, avoid maxing out your credit cards, and give you the security to more confidently pursue your financial goals.
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