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Emergency Funds vs. Savings Accounts: Navigating the Grey Area

Chances are, if you’re reading this blog, you know about emergency funds and savings accounts. But do you know the differences between the two and when to use them?  Life’s curve balls don’t always come wrapped in neatly identifiable boxes.  So there are times when expenses arise which force us to dip into the piggy bank.  But do we dip into the savings or the emergency fund?  Both?  What’s the difference?

Let’s start out by defining specific uses:

Emergency Fund: Usually consists of unplanned expenses, the ones that pop up with no warning such as unexpected bills, deaths, job loss, illness, unexpected life circumstances and appliance repairs/replacements. I hate to mention it again but since the recession is upon us it is imperative that you have at least 3-6 months saved as any combination of the above is likely to create the perfect storm in your financial life. You’ll be able to sleep easier at night knowing that should any or a combination of the above happen, you’ll be covered in the majority of cases.

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Savings Account: This is typically where you save for a specific goal such as down payment on a car or home, childcare expenses, appliances, furniture, educational expenses, investments and hobbies. Obviously, these are planned expenses and not haphazard emergencies. We typically save to meet a certain goal that has been planned for some time. This prevents us from spending money we don’t have through the use of credit cards and increases discipline once the stated goal has been achieved.

The Grey Area This is an area I found myself going back and forth on with my husband because many of these are debatable. We listed the following as being in the grey area: traffic tickets, car getting towed, unexpected tax bill, prolonged medical expenses, legal fees and debt reduction. I’m sure there are more so feel free to list yours in the comments. All of these are debatable which is why they are in the grey area. Still, it makes sense to address these issues before they happen and decide which account should be used to cover these expenses. None of these are planned, but they aren’t dire emergencies either.

Questions to ask your self:

  • Which account would you use to pay the junk yard to get your car back?
  • What about that unexpected tax bill with April 15th around the corner?
  • Legal fees to defend that reckless driving charge?


What about debt reduction? Some believe you should use savings to knock down debt, others believe you can use your emergency fund while some believe in working to pay down debt. I struggle with using my emergency fund to pay down debt because when you know what hits the fan, my bills need to be paid and I would rather pay the minimum in a pinch than give up security. That said I think it wise to create a “when sh*t hits the fan fund” so you’ll be covered and not have to dip into your savings or emergency fund.

What are your grey areas?

 

This article was originally published on Apr 10, 2008  and updated on September 19, 2013.

  • http://www.pipstoday.com/ Shawn James

    I am agree with your all point about emergency funds and savings accounts. Actually, after marriage I had made a planned with my spouses, we organize each week meeting about financials status just discuss about status and planning for futures, we are using excel sheet. In excel sheet fours section we have added like emergency funds, savings (only
    added bonds information), monthly expense record and unexpected funds that’s totally different from emergency funds (that’s our grey areas area 15% saving each month).

  • JCTrojan

    When deciding between the emergency fund or additional debt (assuming others, like me, are in a place where those are the only options instead of a second savings account) I think it comes down to evaluating the true cost of each option.

    If I use the emergency fund to pay for the ‘gray’ expense, where would that leave me if there was a sudden job loss or medical issue between now and the time it would take me to replenish the money? How long would it take me to pay off the expense if I put it on a credit card, and at what interest rate? If using my emergency fund now would force me to use a credit card for another upcoming emergency, do I think my interest rates are likely to go up or down between now and the time it’d take me to replenish the fund?

    Great article, forces us to ask some important questions BEFORE we’re stressed out in the middle of the emergency!

  • http://www.fitscallyresponsible.com/ anna @ fitscally responsible

    My gray area is probably that I have less of an emergency fund than I’d like while I’m saving and paying for my wedding.  When the wedding is done, we’ll have about 6 weeks of an emergency fund.  It will only take us a few months to recover…. but then we have to start saving for a down payment on a house.  

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    Thanks, that must have taken a loads of work to put that together. This is a great summary.

  • http://www.onlinefurniturecoupons.com jack parler

    Thanks, that must have taken a loads of work to put that together. This is a great summary.

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  • http://movingonup45.blogspot.com Movingonup!

    Great Blog! It’s my first time visiting. I agree there’s a difference between a savings and an emergency fund. I need to work on my emergency fund!

    Movingonup!’s last blog post..My mom

  • BP

    My spouse and I just had this dicussion over lunch. We agree that the emergency fund needs to be large enough to cover all our bills for at least 3 months. Getting there will not be easy. All our savings are being used to attack our credit card debt. We have been paying off the smaller amounts and then using the extra funds to payoff the next credit card. It is working but it is slow and steady.

  • http://www.myspace.com/theofficialdocmont The “Official” DocMont

    The bottom line is that you have to live off of less than you make. Let’s not make Cadillac the number one dealer in America with our foolish spending. It takes persistence and consistency to save and increase your wealth…

  • Zee

    Seems to me that what you pay out of your Emergency fund is going to depend upon where you are in the process of fixing up your finances and getting out of debt. When I first started working diligently at getting out of debt for good, my emergency fund ($1000) was for anything that I couldn’t afford to save money for (because I had so many little niggling debts to pay off): so car repairs, illness, unexpected bills, etc…

    Once I paid off several of the smaller debts and freed up some monthly cash, I was able to reallocate some money to saving for expected annual expenses. In my mind, appliance replacement/repair, legal fees, debt reduction, unexpectedly-large tax bills and the like are not emergencies: you know that most of these things are going to happen at some point, so putting some money away into savings every month is a way of planning for them.

    I have never had to dip into my emergency fund (touch wood!) but my general rule of thumb is that I will only pull from that if I’ve squeezed every penny from my budget, used the all the cash in my normal savings account and I *still* need more money in order to meet some unexpected expense.

    What I’m a bit puzzled for is why debt reduction is considered “saving” at all? I pay as much as I can each month towards my debts out of my normal day-to-day budget. That money never sees either savings account. :)

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  • http://www.msmoneysavvy.com savvy

    For me, the emergency fund is do not touch unless there’s some catastrophic event (i.e. job loss, serious illness, etc.). I have also general savings (not earmarked for anything in particular) that would be used for large unexpected expenses (like heaven forbid, the roof blew off).

    Smaller unexpected expenses (i.e. unexpected bills, small repairs) as well as investments/hobbies/whatever are taken care of out of normal cash flow. Large purchases (i.e. furniture, travel) are planned in advance and saved for.

    savvy’s last blog post..Evaluating the Wisdom of a Purchase

  • Rosie

    First of all, I just have one set of money that I dip into for anything that isn’t a set monthly expense… even hobby purchases if the pool of money is large enough that the purchase doesn’t deplete it.

    But in the set of rules you’ve put up there, I would say that instead of having a gray area, you should put debt reduction on the savings account side and all the rest of the gray area stuff on the emergency fund side. Then emergency fund stuff consists of things that may or may not happen (I mean, you can pretty much guarantee that ONE of those things will eventually happen, but each individual thing might never happen), and savings account stuff is stuff that you know you are going to have to pay. If you have debt, you know you are going to have to pay towards debt reduction. If you want to take vacations, you know you are going to have to pay money towards saving for them.

    Or alternately, you could just consider the emergency fund as the fist line of defense against unexpected bills, with the savings account being the second line of defense.

  • Ginger

    Thats the thing, do you want to dip into the emergency fund or do you want to sacrifice some of your discretionary spending? Different people would handle the situation differently. I’d probably use my discretionary spending because its not a dire emergency but I dont want to deplete the emergency fund unless I absolutely have to..

  • http://sunili.blogspot.com Sunili

    Is the ‘grey area’ the ‘sh*t hitting the fan’? I wonder whether some of those things could be emergencies, eg when the car gets towed and you rely on it for work, doesn’t it makes sense to dip into the ‘emergency’ fund to pay to get it out?

    I guess I wonder… what’s the difference between an ‘emergency’ and ‘fan-slug sh*t’?

    Sunili’s last blog post..Women @ Work

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