This post is all about the 9 emergency fund mistakes you will never make again.
Estimated Reading Time: 9 minutes
At this point, we’re all familiar with life’s tendency to throw a curveball or two. Especially when we least expect it. Sometimes these unexpected events can leave us scrambling to catch our breath just when we thought we had it all figured out.
Now, I’ll be honest – I know next to nothing about baseball. However, I do know a thing or two about being prepared for when those curveballs come flying my way.
It’s not just about dollars. Emergency funds are a security net that provides us with a sense of financial stability. They assure us that when life throws those curveballs our way, we’re not just swinging blindly but knocking them out of the park.
So, whether you’re a baseball fan or someone who’d rather not hear another baseball reference again (me), this is a game plan you won’t want to miss.
But before that. Let’s get some basics out of the way.
What is an emergency fund and why is it important?
Your emergency fund serves as a practical solution for unexpected expenses and emergencies. It’s a financial cushion that comes into play when life takes an unexpected turn. With this fund in place, you can address unforeseen situations without resorting to credit cards or accumulating unwanted but necessary debt.
Having an emergency fund is important because, without it, even a single unexpected emergency can lead to accumulating debt and elevated financial stress. And to top it all off, it can can set you back from the financial progress you’ve been working so hard on.
So, let’s get real about changing things around here.
What are the 9 emergency fund mistakes you should avoid?
Not Having an Emergency Fund AT ALL
I said this before and I’ll say it again for the people in the back. Having an emergency fund is absolutely crucial.
When unexpected expenses inevitably come knocking (and trust me, they will), the last thing you need is to find yourself staring at your bank account, feeling disheartened. And sure, credit cards or personal loans might be your Plan C, but they should never be your go-to.
While personal loans might promise same-day solutions, let’s be real – they can be pretty predatory. These companies often target individuals in tough situations, promising a quick fix to their problems.
Quick decisions aren’t always the best ones. Sometimes, with loan origination fees and interest rates, you might end up in a deeper hole than where you started.
So, here’s the bottom line: Don’t let the lack of an emergency fund be the reason you find yourself drowning in unnecessary debt. Your dedicated emergency fund should always be your first line of defense for any financial emergencies.
Not Putting Away the Right Amount
Don’t fall into the common trap of underestimating the amount of money needed for your emergency fund. While $1k might offer some relief on a rainy day, it’s unlikely to cover you adequately if the next unexpected expense arrives sooner than anticipated.
If you’re just starting your emergency fund, be aggressive until you’ve set aside at least one month’s worth of crucial expenses (covering shelter, food, and bills). Then get into the habit of saving and “multi-tasking” your money. If you’re battling with high-interest debt, the faster you are able to pay it off, the faster you’ll be able to contribute more to your emergency fund.
Consider your personal circumstances, such as job stability, family size, and potential financial obligations when determining the amount of money you need to save. If you are self-employed or work a commission-based role, consider saving beyond the standard recommendation to ensure your finances align with your specific needs.
Not Reassessing and Adjusting
You know that feeling when your bank account gets an influx of cash, and suddenly, the universe NEEDS you to spend it?
AND OPE, suddenly your furnace doesn’t work or your roof is leaking. Sound familiar?
Yep, the universe can sniff out an extra $2,000 in your account without fail. Life’s circumstances are a big player and you should always be revising your emergency fund account to ensure your funds would cover any new life changes.
Got a house, got married, or welcomed a baby? Congrats, but with those life events come a new mix of responsibilities and expenses.
That leaking toilet that used to be your landlord’s headache? Now it’s yours, and it won’t be a cheap fix. Time to reassess that emergency fund, and adjust the volume to match your new life.
Investing Emergency Funds in Risky Assets
Emergency funds should be easily accessible and not subject to market fluctuations. Putting your emergency fund in risky investments may lead to losses precisely when you need the money the most.
The best place for an emergency savings account is within a high yield savings account (HYSA). The beauty of a HYSA lies in its accessibility, with no fees, penalties, or hoops to jump through. You don’t want your funds tied up when an emergency strikes.
That’s the point, right? To have your money at your fingertips when needed, making the HYSA an ideal choice.
Plus, with favorable interest rates, you can generate passive income without assuming any risks. Traditional savings accounts, on the other hand, may only yield pennies in interest, making them a less attractive choice.
Using the Emergency Fund for Non-Emergencies
Your emergency fund should not be a catch-all savings bucket.
It’s crucial to distinguish between your emergency fund and money put away for expected expenses like home maintenance, car upkeep, holidays, back-to-school costs, and travel. Consider creating multiple savings “buckets” to keep your financial goals organized. Another name for “buckets” is “sinking funds”.
Many HYSA providers offer this feature, allowing you to compartmentalize your money within the same account for different purposes.
Most importantly, resist the temptation to dip into your emergency funds for non-essential expenses. Define what counts as an emergency – medical crises, unexpected car repairs, sudden job loss.
By maintaining this idea, you ensure that your emergency fund remains a reliable safety net for genuine emergencies.
Not Automating Contributions
Setting up automatic transfers to your emergency fund ensures consistent contributions and helps you avoid spending the money before you save it.
Paying yourself first is one of the best money-saving techniques you can utilize in your saving journey. Although paying yourself first is important, paying your future self comes as a close second.
RELATED POST: 7 Best Money Saving Techniques You Need to Try Right Now
Why is it so crucial? Well, automating your contributions transforms the act of building your emergency fund from a sporadic effort into a consistent habit. And we LOVE good habits.
So, let’s not skip a beat – automate those contributions and let your financial future flourish with consistent savings.
Neglecting Regular Reviews
Failing to review your emergency fund periodically can lead to its exposure to inflation or increases in living expenses. This might be difficult to recover from if you fall too far behind.
The past 4 years have been a rollercoaster ride for everyone. At the same time, everyone experienced the pandemic differently depending on how prepared they were for what unfolded. (Realistically, nobody was actually ready for what happened).
However, while the pandemic “went away,” the spike in prices and cost of living due to inflation is here to stay.
If you are an individual who has not checked on their emergency fund since 2019, it might be time for a health check to make sure your fund still reflects the recommended 3-6 months of funds to cover necessities. Regularly, check if the amount you’ve saved is still sufficient for your current situation.
Ignoring High-Interest Debt
While creating an emergency fund is undoubtedly crucial, let’s not forget the importance of addressing high-interest debt. It’s a balancing act that requires your attention – make it a priority to chip away at those high-interest debts while simultaneously building your emergency fund.
This “multi-tasking” strategy not only protects you against unexpected expenses but also prevents the accumulation of unnecessary interest payments.
By successfully managing both, you not only strengthen your financial base but also expedite your path to a more secure and debt-free future.
Lifestyle Adjustments
Now, I’m not one to push the idea that you can’t have nice things or that splurging on a new or a “new to you” car is a waste of your money.
I know… controoooversial.
If there are items in your life that genuinely make your heart happy, don’t let anyone tell you you’re a bad person for spending YOUR money. I don’t believe in putting in a lifetime of hard work to deny yourself any fulfilling experiences until you’re 59 and a half.
However, I also believe in living within YOUR means. Allow your budget to reflect your priorities and values.
Before impulsively buying that new car, consider the overall cost of ownership beyond monthly payments. Just because you can swing the monthly payments doesn’t automatically translate to affording the maintenance.
I’m not saying, “Say goodbye to your dreams”, instead, let’s make sure you’re not putting your budget at risk.
If this is something you truly want and your current budget says you can’t afford it, it may be time to get a little creative. Maybe there are other things you are spending your money on that can be evaluated in exchange. Or maybe it’s time to come up with another income stream that can guarantee you have the funds to pursue your passions.
It’s not about depriving yourself of things you may want. It’s about ensuring a solid financial foundation for the unexpected twists life may throw your way.
Final Thoughts
In a nutshell, having no emergency fund is playing with fire. Because of this, it is recommended to aim for three to six months’ worth of living expenses, adjusting as life evolves.
Choose low-risk, accessible investments like high-yield savings accounts. Set up automatic contributions for consistent savings dedicated to real emergencies.
Regular check-ins are vital, especially considering recent economic ups and downs. Tackle high-interest debt while building your emergency fund for a debt-free future. Live within your means, letting your budget reflect your values, ensuring a strong financial foundation for life’s unexpected expenses.
FAQs
Should I have a 3 or 6 month emergency fund?
The length of your emergency fund depends on several factors, two of them being personal circumstances and risk tolerance.
A 3-month emergency fund is a good starting point and can provide a financial cushion for unexpected expenses. But it is often regarded as the minimum to aim for. It covers the basics and can help you navigate short-term setbacks. However, if you’re looking for a stronger safety net, or you have dependents, you might want to aim for a 6-month emergency fund instead.
Consider these questions to help determine the best option for you.
- Do I have a steady income, or is my income variable?
- Have I paid off high-interest debts or taken steps to manage them?
- How secure is my current employment situation?
- Have I created a realistic budget, and am I consistently sticking to it?
In the end, it’s about finding the balance that aligns with your unique situation and provides you with the confidence to face the unexpected setbacks that life might throw your way.
Is $20,000 too much for an emergency fund?
Since the “right” amount for an emergency fund can vary based on individual circumstances, there’s no one-size-fits-all answer.
Having $20,000 as an emergency fund can serve as a robust 10-month financial cushion for someone with a $1,500 mortgage/rent and minimal debt and expenses. On the flip side, it might only provide 4 months of coverage for an individual dealing with a $4,000 mortgage/rent and a high cost of living.
While $20,000 does offer a comfortable buffer for many common emergencies, it’s crucial to position every emergency fund alongside the specific budget it will be supporting.
The “right” amount also depends on your personal comfort level and financial goals. If you have other financial priorities, such as paying off debts or investing, you might choose to allocate a portion of your money to those goals.
Are money market accounts different from high yield savings accounts?
Money market accounts (MMAs) and high-yield savings accounts (HSAs) share some similarities, but there are key differences between them.
| Feature | Money Market Accounts | High-Yield Savings Accounts | |
| Flexibility | Check writing and sometimes a debit card available. | Check writing and debit cards not available. May limit the number of withdrawals you can make in a month. | |
| Interest Rates | Competitive rates, but not always as high as HYSAs | Known for offering higher interest rates. | |
| Minimum Balance | May require a higher minimum balance. | May have lower minimum balance requirements. | |
| FDIC Insured | Yes | Yes |
When should I use my emergency fund?
Your emergency fund is your safety net, and knowing when to use it is key to maintaining your financial health. It’s there for unexpected, necessary expenses that could otherwise disrupt your budget or financial stability.
Here are some examples of unexpected expenses you may experience.
- Medical Emergencies: Unexpected health issues or medical expenses not covered by insurance.
- Car Repairs: Sudden, essential repairs to keep your vehicle running.
- Job Loss: Unexpected unemployment.
- Home Repairs: Urgent repairs, like a leaky roof or a malfunctioning furnace.
- Family Emergencies: Unforeseen situations that require immediate financial support.
In this post, you learned all about the 9 emergency fund mistakes you will never make again.
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