Emergency Funds vs Savings Lets Learn the Difference

Emergency funds vs savings are two different things even though they are both the result of collecting money from work. It’s important to recognize the difference between the two so that you do not make mistakes in using money. Here are a series of differences between the two that need to be understood to help determine financial priorities.

Emergency Funds vs Savings, Know the Difference!

1. Time Period

In terms of time period, collecting money for an emergency fund requires a shorter time. Money for an emergency fund is usually collected in the short or medium term without being used before an emergency. Therefore, emergency funds tend to save money continuously as a financial safety net and are used only when needed.

Meanwhile for savings, although both collect and store money, the time period can vary depending on the goals you set. There are short-term savings and there are also long-term or medium-term savings. How long you save depends on the savings goal that you have planned at the beginning.

2. Purpose

There’s also a difference in terms of purpose, where emergency funds are usually only used when you face unexpected situations. Urgent situations such as car repairs due to accidents, being hospitalized for certain illnesses, to home damage. The money set aside for emergency funds can be used for these sudden events.

The difference between an emergency fund and savings needs to be understood so that budget usage is right on target. If emergency funds are intended for sudden and emergency events, then savings are saved for planned purposes. There are savings for vacations, school, marriage, buying a house, retirement savings and many others.

3. Ideal Amount

The ideal amount of money collected for an emergency fund can be based on 3-6 months of routine monthly expenses. Every 3-6 months there will likely be situations that require emergency expenses. Meanwhile, the ideal amount of savings depends on the goals you’ve determined, whether for education, marriage, or other needs.

4. Flexibility of Use

In terms of flexibility, emergency funds can be classified as inflexible funds, not for routine expenses or personal desires. Money can only be disbursed or withdrawn for use in emergency situations or when really needed. While savings are more flexible because they adjust to needs or desires according to personal plans.

5. Accessibility

Emergency funds vs savings accounts in terms of accessibility are easier to withdraw because they’re needed at any time. Meanwhile, special short-term savings have higher accessibility because they can be withdrawn according to the purpose. However, for long-term savings or deposits, it sometimes takes time to access them.

6. Risk

Emergency funds can be collected through investment, but should not be stored in high-risk instruments such as stocks. When the value drops easily, this can be detrimental to you when you want to take it when needing funds. Meanwhile, savings have a lower risk depending on the goals and time frame.

Emergency funds vs savings are two different things that you should understand from the start. This understanding makes it easier to separate emergency funds and savings so you can manage your finances more strategically. Although different in many ways, both are funds that you need to live more peacefully.