You may have heard the terms 'emergency savings' and 'rainy day funds' and think they're interchangeable terms.
However, there is a difference and they are both equally important in terms of protecting your budget and overall financial security.
David Sant from Cyprus Credit Union joined us to talk about the differences between the two types of funds and why they are both important.
Rainy day funds are intended for those smaller, more common expenses, such as a car or appliance repair. Typically, these accounts contain about a couple thousand dollars. So, while they may not be enough to live on, they can cover you in a pinch.
Emergency funds are built for longer term expenses, such as losing a job or unexpected medical expenses. It has been recommended that you have at least three to six months` worth of living expenses set aside in this type of account.
Sant says you should first open accounts that aren't tied to your regular accounts and debit or credit cards but are still easily accessible when you need them. This will prevent the temptation of using this money elsewhere. While traditional Certificates and investment accounts offer higher rates of interest, these accounts aren't advisable because you may have to pay fees for early withdrawals.
While it may be easier to keep all of your savings in one 'blob', it can make it difficult to differentiate what the specific funds are for. For example, if you are saving for a vacation and starting an emergency account at the same time, where does one start and the other begin? How is the account split? What are you actually able to spend without upending your other financial goals? Having separate accounts for all of your savings needs makes it easier to track your progress and know exactly how much you have available.
For more financial advice, please visit: cypruscu.com