Firstly let’s differentiate the two as it is of my opinion that there is a huge confusion between them. An emergency savings is spare, extra and back up monies that we set aside in case of a crisis, or unforeseen expense. Savings however could be your provident fund, your child’s educational plan, your accumulation of funds for wealth creation, a car deposit, a dream vacation, etc.
The confusion lies in when one regards the latter as ‘in case of emergency’ monies. Meaning, it’s become a trend in clients to make sure their savings have liquidity or access ‘in case of an emergency’ hence confusing the both. This is a recipe for disaster indeed. If the savings are dipped into for emergencies then your entire savings objective is immediately compromised.
The one cannot and should not be a substitute for the other. For instance, you change jobs and transfer your provident fund proceeds into an approved preservation fund, knowing in the back of your mind you are entitled to a single withdrawal. Because subconsciously you are aware of the easy access of funds it ends up being the first go-to funds when an emergency arises.
What you should have been doing is growing a fund separately so that you don’t end up risking your retirement planning and avoid regrets. When we consciously separate the two concepts in our mind and are able to identify the difference, we won’t fall into the horrible trap of making the mistake of sacrificing one financial goal for another unplanned emergency.
A vehicle for liquidity could be a money market or alternate low risk assessable fund that potentially can keep up or outperform cash returns and inflationary rates. While one sometimes keeps aside an emergency fund for long periods remember it should be considered as a short term savings as it could be used at any time. Savings for a particular goal however should be invested in funds that are suitable for the term of your savings.
For instance funds geared for three-five years goal would differ from funds used to attain an eight-10 year goal.
Life happens and we all will get curve balls thrown at us; so prepare for it and don’t assume it won’t happen to you. That’s the difference between being a passenger who lets life happen and being driver in control of your own circumstances.
