How do a savings account and a retirement account differ? A savings account helps to insulate you from financial emergencies or unexpected expenses. A retirement account consists of money you are putting away for the specific purpose of retiring.
When it comes to saving money, there are many options. Setting aside a certain percentage or amount from each paycheck for savings is a smart move, while saving for retirement is equally important.
Your savings account should be just that, savings. You shouldn’t use it for discretionary purchases, but only in case of emergencies. When creating your budget you have already accounted for re-occurring expenses like rent and utilities. You may also have an amount already set aside for non-recurring expenses like car repairs or dental work. If that amount gets depleted then your savings will need to be used.
While it’s important to have a standard savings account, there are certain savings accounts which provide for specific purposes. Examples of these may be a special savings program like Christmas Club, or the 529 college savings plan. A Christmas Club account allows you to contribute year-round for the expected expense of Christmas shopping. You’ll also earn some interest on the money saved in the account. A 529 college plan, better known as a “qualified tuition plan” works similarly, but over a greater amount of time.
These are designed to help you save money over a specified period for a future expected expense.
Having a retirement account is a different process. Individual Retirement Accounts (IRAs) and 401k plans are two widely known retirement mechanisms. Retirement savings are meant to be just for retirement, and your contributions along with compounding interest can help them grow. That’s one reason having a regular savings account is important. That way if an unexpected expense comes up, you aren’t even tempted to pull retirement money out of your account.
A big part of making a budget work for you is deciding how much money to set aside for emergencies, vacations, and holidays, and how much to put into long-term accounts. Having both a savings and retirement account for the future is a great way to stay on track with your financial goals, but it’s important to remember that a retirement account should not be viewed as a savings account unless you’re at retirement age.
Learning to manage a budget becomes a fairly simple task with a bit of practice. Take a look at The Basics of Budgeting to get started.