Savings v.s. Emergency Fund
Did you know that 66 million Americans have zero dollars saved for an emergency expense? (Doerer, Kristen, Paul Solman, “Can you guess how…”) Or, Do you know the difference between a savings account and an emergency fund?
If you don’t that’s okay, because I am here to tell you the difference. Everyone knows what a savings account is and its purpose, but not too many people use it correctly.
You have a savings account and you put money in it-right? Yes. However, you are constantly transferring money out into your checking account.
There are very few reasons to take money out of your savings account and those are:
Rent/ mortgage payments or down payment for a house
Planning to go on a vacation
Big purchase items (such as new furniture, house renovations, and etc.
You put money in your savings account because you plan to spend the money at a later time. These big purchases take months to save up for and delay instant gratification. Separating your money from your checking account for rent prevents you from spending it on daily transactions. There should be no excuse for you to not have enough money for rent when you have properly planned to set the money aside.
Now that you know how to use a savings account properly, I will explain how to use an emergency fund.
What is an emergency fund? It's pretty self-explanatory. You save up money for an emergency. I highly recommend that you should have at least 2-3 months worth of fixed expenses saved in an emergency fund. You can go to the bank and add another savings account and label it emergency fund. Your emergency fund is not like your savings account. You should never take out money from this account unless it is truly an emergency.
Well, what qualifies as an emergency?
You lost your job ( the unemployment check usually lasts for 3 months)
Your house burns down (your homeowner's insurance won't pay for all of the contents that were in your house )
Your car unexpectedly breaks down.
There was a death in the family (you have to fly out-of-town or pay for the funeral )
Maybe one of your household appliances suddenly stops working
Basically, any unplanned expense that happens in your life without prior notice. But here's the catch. You have to return the amount you took out. The emergency fund is supposed to be for a rainy day or rainy days ONLY. This is the financial cushion you provide for yourself. When you have a financial cushion you have less stress and you won't be unprepared. These accounts have different purposes and should not be combined. If you combine these accounts you will eventually spend all of the money for the wrong reasons. It's better to keep them separate so that you can effectively manage your money.
They are some who may disagree, but of course, I recommend that you have one anyway. https://www.investopedia.com/articles/personal-finance/123113/why-emergency-funds-are-bad-idea.asp
Here is my response to the article article:
Unemployment only last for 12 weeks, but you can ask up to a 6-month extension. Sometimes they may deny your request. Sometimes you may not find a job within that 6-month time period.Homeowners' insurance does not cover all the contents of your house. Plus not all homeowner insurance is the same. Claims Take Time! You are immediately homeless once your house has burned down-unless you have a family member to stay with.Just like everything else, your household appliances start to break down or become broken. Insurance on those items only lasts a certain amount of time. No one expects their loved ones to die randomly , but you can ask people and they will tell you planning and paying for funeral costs are hard on the family emotionally and financially. They are very expensive. A Life insurance check doesn't come in the mail the next day to pay for the funeral cost. Yes, you will get your money back but if you don't have the money in that moment you are stuck.Sometimes your car breaks down. Not everyone can just pull money out off thin air to buy a new car. Also, if you have bad credit, you could possibly be rejected. It may not be that much to put down a down payment on a car but if you can't afford a new car you just can't. I am not trying to sound like a pessimist but these are real-life circumstances that people may actually go through. It's better to be prepared for the worst than not at all.
Not all situations are in your control.
Warning: There is a delay when dealing with all types of insurance, so expect a temporary wait.
Anyway, shine bright my beautiful gems!
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