5 Ways You’re Misusing Emergency Funds (And How to Stop Now)
If you’re among the minority of Americans with money set aside just for emergency situations, good for you. Having an emergency fund means you won’t have to go into debt when an unexpected event occurs, which it inevitably will.
This type of planning ahead is a sign of good financial health and a good budgeting strategy.
But sometimes it can be tempting to use that emergency fund for non-emergencies. It’s not doing any good just sitting there. Right? Well, if this thought occurs to you, I have just one thing to say – don’t do it!
Think of your emergency fund as insurance against disaster. Better yet, don’t think of it at all. Here are some tips and tricks for making sure you never use your emergency fund for non-emergencies.
1. Underestimating how much you need
Most experts agree between four and six months of living expenses is a solid amount to have set aside.
Of course, more is better to a certain degree. If you can save a full year’s worth of expenses, you’ll be prepared for just about any emergency that comes along.
2. Confusion as to what constitutes an emergency
Some people would dip into their emergency fund for things like car repairs or medical expenses. While this can be a solution, I recommend exhausting all other options for paying that type of expense before you dip into your emergency fund.
Even using a credit card if you can pay it off in a short period of time is better than using your emergency cash.
3. Merging your funds
Where you keep your emergency fund money is a big factor in avoiding spending it for non-emergencies. It’s best to keep your emergency fund money separate from your regular bank or credit union.
Open an account specifically for this purpose, and do not have a debit card associated with the account. It should be as difficult to access as possible.
That said, it should still be liquid and you should be able to access the cash when an emergency does arise, which means don’t put it in an investment account!
“Being prepared is part of
making sound financial decisions.”
4. Not keeping track of current financial needs
Most people’s living expenses increase over time, so you should periodically review your fund amount to make sure it still meets your requirements and goals.
If needed, add more money to the account to bring it back in alignment with your current financial situation.
5. Starting too small
Even a $1,000 emergency fund can help you avoid a hefty credit card charge. I especially recommend doing this for people who still have credit card or other debt to pay off.
By starting an emergency fund with as little as $1,000 or so, you will establish a method for maintaining it.
Then as you pay off your debts, contribute to your emergency fund instead so you are paying yourself rather than paying someone else.
Having an emergency fund is a great way of ensuring you don’t fall deeply into debt when and if an emergency situation arises. As long as you avoid using your emergency fund for non-emergencies, it also can be a great way to save over time.
Being prepared for whatever life throws at you is part of making sound financial decisions – and that’s always good!
Photo source: blogcdn.com