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Do you have a big expense you need to cover? If so, it might not be obvious where to pull the money from.
For anyone who has an emergency savings fund — which is less than 60% of us — you have at least one good option to consider. But if you've got additional savings, the choice might not be quite so clear cut. Ultimately, the best decision depends on whether the expense was planned and whether there are any penalties you could face for withdrawing the funds.
What's the difference between an 'emergency fund' vs. 'savings'?
Some people use the terms "emergency fund" and "savings" interchangeably. There's nothing wrong with that, since an emergency fund is a type of savings, but there can certainly be material differences between the two.
If you're using an emergency fund as intended, you've got money earmarked explicitly for unpredictable expenses that come up every so often, but that don't fit within your regular budget. For example, this could include a bill for an unplanned but necessary medical procedure.
General savings funds, on the other hand, are meant for money you're setting aside to cover specific, planned expenses. Think: Money for an upcoming vacation, the down payment on a home, or for paying your business taxes. Some people also refer to this kind of savings as a sinking fund, meaning money that will be "sunk" on an irregular — but planned — purchase.
Read more: What is a sinking fund, and why do you need one?
For emergency funds, you want quick, penalty-free access. For example, you might keep the money in a high-yield savings account or money market account.
On the other hand, you may not need to access your general savings funds right away. So, you can put the money into a bank account where you trade some liquidity for higher interest rates. A certificate of deposit (CD) is one example.
Read more: How much money should I have in an emergency savings account?
When to use your emergency funds over your other savings
1. You’re facing a true emergency
As obvious as it may sound, an emergency fund should only be used if you're facing a genuine emergency. This typically means you have an expense that's essential but unplanned.
It's impossible to list all of the circumstances that could qualify as an emergency, but here are some of the more clear examples:
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Emergency medical or veterinary bill
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Total or partial loss of income
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Relocation forced by natural disaster
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Funeral expenses
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Major car or home repair
If you find yourself facing one of these circumstances, you might also consider informing your creditors before pulling cash from any bank account. During certain hardships, some creditors are willing to help by reducing or deferring your payments, or by changing your payment due date, so there's a possibility you might need less cash than you think.
Read more: 5 things to do if you can’t pay your credit card bill
2. You want to avoid penalties
Another reason to pull from your emergency fund instead of savings is if it will help you avoid penalties. If your savings is in a CD, for example, you'll face a penalty for making an early withdrawal, which usually entails forfeiting some of the interest you've earned.
Read more: What is a CD early withdrawal penalty?
For money in your savings account, you could potentially face other penalties for a withdrawal. Some accounts have minimum balance requirements and/or limits on the number of monthly withdrawals you're allowed to make. If using the money means incurring fees and/or lowering the amount of interest you can earn, you might want to find the cash elsewhere.
You might also consider a withdrawal from your retirement savings, but the penalties for this move can be especially steep. In some cases, you'll have to pay income taxes on the withdrawn amount, and unless you qualify for a special exception or you're over age 59½, you could also be hit with a 10% early withdrawal tax.
Frequently asked questions (FAQ)
Where should I keep my emergency savings?
The best place to keep your emergency savings is in a savings account that earns interest, but where you can make withdrawals at any time without penalties.
Should you put your emergency fund in a CD?
A CD is not a good place to keep your emergency fund since you could face a penalty if you need to withdraw the money before the CD matures. For emergency funds, the money should be kept in an account where you have access any time you need it.
Should you have a savings account and an emergency fund?
You don't necessarily need two separate bank accounts for your savings and for your emergency fund, but it's a good idea to set aside money both for upcoming planned expenses (also known as savings), as well as for unexpected expenses (your emergency fund).
