The terms emergency fund and savings are often used interchangeably. The reality is, however, that these two saving methods are very different. It’s important for investors to understand these differences and the purpose of each type.
What Is an Emergency Fund?
As the name suggests, an emergency fund is money a person sets aside to pay for various unexpected expenses. For example, an emergency fund can be used to cover the cost of home repairs or provide financial security in the event of a long-term illness or job loss. Since these funds are for emergency situations, it’s best to save money in a bank account that provides instant access to cash, as needed.
What Is Savings?
Savings, on the other hand, is money set aside for a specific purpose, such as a down payment for a home, vacation, retirement, or college fund. The main difference between savings and an emergency fund is that savings are goal-oriented. Since these funds don’t need to be immediately available, investors can use stocks, bonds, 401(k)s, or other investment options as part of their overall savings strategy.
How Much Should Investors Save?
Although there is no set limit, most experts agree that people should have at least 3 to 6 months’ worth of earnings in their emergency fund. The amount to keep in a savings fund depends directly on the investor’s specific future goals and objectives. Instead, a set amount should be set for each specific goal and investors should develop a plan to help them meet their financial objectives.
How to Start Saving?
It would be impossible for most investors to build a savings or emergency fund overnight. Instead, planned savings requires a strong commitment and a set plan in place. Investors should start by creating a realistic budget and determining how much money they have available to set aside each month. Ideally, this amount should be between 10-20% of one’s total earnings. Start by building an emergency fund. Then, focus on developing a savings plan.