Which should you prioritize first, an Emergency Fund or Savings?

Being organized is crucial when it comes to your finances. Understanding the distinction between savings and an emergency fund is one method to do this.

Savings versus emergency money

The money you set away for savings might be used for a variety of things. Savings might be made for no particular reason at all or for specific purposes like a trip or a new car. On the other hand, as the name implies, emergency funds are what you set away in case of an emergency. If a situation arises, the money is available for use. Savings and emergency reserves can both be helpful in case of an emergency, and having only one of the two could leave you without money if one arises. Because of this, it's crucial to have both emergency and savings accounts so you have a safety net in case something unforeseen occurs.

How can I put my emergency fund to use?

For times of unforeseen high expenses or significant financial change, you should have an emergency fund. When you might have to use your emergency savings, for instance, are the following:

• You lose your job and must pay your bills until you locate another one.
• Your health is in danger.
• You have to fix your car after it breaks down.
• Make a last-minute travel arrangement now (for instance, in the event of a loved one's passing).
• A storm or fire causes damage to your home.

To avoid being tempted to use incidental expenses as justification for emergency spending, it's critical to define what constitutes an emergency and what doesn't.

Why is it important for me to understand how savings and an emergency fund differ?

Although they are similar, savings and an emergency fund serve quite different purposes, so you must understand the differences. While savings are for general aims, an emergency fund is for unforeseen costs. Knowing the difference will help you manage your money more effectively and be ready for anything that may arise.

Which should you prioritize first, an emergency fund or savings?

Even though it could seem as simple as picking one of the two, the fact is much more complex. So, a lot relies on your circumstances and standing. Priority is given to debt, such as overdue credit card payments, if you have any. If you don't already have any, or once you're done with that, you can begin saving for an emergency fund. Which of the two you have first is not really important. It's important that you begin working on at least one of them. You can even begin both at the same time by contributing a small sum each month to your emergency fund and savings. Every paycheck savings of any size is preferable than none. You'll be ready for whatever financial challenges may arise by doing this.

Read my separate blog post here: Why and How to Create an Emergency Fund?

Where should I keep my emergency savings?

It's almost as crucial to know where to maintain your emergency fund as it is to start one. Your emergency money might be placed in one of two principal places. You might either stash the money at home or deposit it in a savings account. You can get to your money when you need it using either method. However, you should exercise particular caution while leaving cash at home because it is vulnerable to theft. Additionally, if it's too simple for you to get to, you might spend it on things that are not emergencies.

Where should I save my money?

When it comes to safeguarding your savings, you have more options. A savings account, a money market account, or a time deposit are your options. Because they all provide stability and liquidity, these are all excellent choices. This means you won't have to worry as much about the value shifting and that you may access your money whenever you need it.