5 Emergency Fund Mistakes, Avoid These Common Slips
This article covers the most common mistakes to avoid when preparing your emergency fund.
The goal is to avoid adding more fuel to the fire when emergencies happen.
What is an Emergency Fund? An emergency fund is a savings account that has been set aside for an emergency. The purpose of this account is to help you get through your financial emergencies without going into debt.
Give yourself peace of mind knowing that most situations can actually be planned for.
What qualifies as an emergency?
An emergency could be a family member needing medical care. Another, could be a job loss or health problem that requires medical attention, even a natural disaster.
Emergencies happen, it’s best to be prepared for the event before it happens.
Our tips will help you to avoid stress and will allow you to be more in control and efficient during a crisis.
How much of an emergency fund should I have?
Before you figure out how much you should be allocated to an emergency savings fund, it’s wise to determine what an emergency is to you.
While some people are at a greater risk for loss of income than others, it is important to be prepared for an emergency before it happens.
The best way to determine how much you should put into your savings account for your emergency fund each month is by answering the following questions:
- Do you have insurance policies? If so, how much are your monthly premiums?
- What are your monthly expenses as they relate to food and transportation costs?
- How much do you spend on entertainment every month?
- How many months would it take for these expenses to cease if there was no income from employment or other sources?
Once you’ve determined your financial needs, look at the amount of money you have saved over time and compare that figure with what you will be need if an emergency strikes.
The point here is not only to make sure that enough money has been accumulated but also that this amount can last until the crisis passes. Most don’t realize just how quickly crisis can happen without warning.
An article from WellsFargo, says it is good to have three to six months saved to cover your essential expenses.
Decide how much you can set aside each month or week to reach your savings goal. It might be wise to work diligently to accumulate your savings as soon as possible.
On a planning standpoint, if you pay more than your minimum on your credit card, pull back and focus saving towards your emergency fund.
Your credit card debt can wait. The main goal is to get your savings established. Then, work hard towards paying down your debt.
Now, let’s jump into the most common emergency fund mistakes:
Mistake 1: Don’t let procrastination stop you
Not starting your emergency is a mistake. Knowing you should start your emergency fund is great, but failure to plan and execute is the pitfall to avoid.
Don’t let procrastination cost you big money. Just start when you see it is possible. According to statistics, 25% of American households report not having an emergency fund. Do your best to avoid being included in these statistics.
Making excuses for why you failed to start, like, I don’t have advanced math skills so I can’t start, is just an excuse. Save money and avoid this common emergency fund mistake.
Mistake 2: Money is Too Easily Accessible
A common mistake that gets you in trouble is having easy access to your emergency savings. Avoid stashing your money where you have easy access, it is the best way to avoid temptation.
Understanding what truly is considered an emergency will help you avoid using your emergency savings for non-emergency purchases or self-loans, I-O-U’s.
Another trap to avoid is, having a specific credit card that is used for emergencies. It can be too easy to forget and use this card at any moment.
Make yourself aware of what is considered an emergency and avoid the mistake of taking small loans from your savings or using your emergency savings for unqualified emergencies.
Mistake 3: Emergency Fund is hard to access
Emergencies are unexpected and sudden, and having money at hand might not be possible. So what do you do when this happens?
Do you have your emergency savings invested in a bank or in your Fidelity, 401K ?These are all great places to save money, but did you know that it might take days to access your money? It can be a big problem if something happens and you are not prepared.
If you invested your emergency savings in an emergency savings account, you might want to have a backup plan if something happens.
There are many options of places to save, just remember an emergency fund is to help in the event of an emergency.
How will you manage if your money is not accessible? It is best to discuss situations with the members of your household and determine how to best invest your emergency savings.
Our best piece of advice is to open an emergency savings account that can be accessed and available when you need it without waiting. Have a solid plan for whatever can happen.
Mistake 4: Forgetting To Reassess Your Savings
Many newlyweds decide together that it makes sense to start an emergency fund. This is wonderful news. They spend a few years until they reach their goal and then celebrate.
Their goal was reached, and now they don’t have to worry anymore.
A few years go by, now they own a house and have a family, their expenses have doubled, maybe even tripled.
If you have not used your emergency fund in years, then it is time to reassess your savings. Be sure that your savings align with your current lifestyle. Add more if you find it necessary.
Overtime, your income and expenses increase. Maybe, your emergency fund seems like it might only cover one month of expenses if you or your spouse lost their job.
This is why you want to avoid the common mistake of forgetting to reassess your savings.
Mistake 5: Not Replenishing Your Savings After Using It
The next most common mistake made when having an emergency fund is not replenishing your funds after using them.
Believe it or not, this is the most common mistake and the one many don’t realize is so important. Just like not reassessing your funds, not replenishing it can be lethal and cost you big time.
Debt from an emergency can be just as deadly to your credit as credit card debt. Debt is debt, and avoiding it is the best practice you can follow.
Here is a great example of the results of not replenishing your emergency fund.
Say you had an emergency come up two months ago. You needed to reach into the fund, but you didn’t entirely exhaust your savings. There is still some money in the account.
After the emergency, you told your spouse we need to start depositing back into the emergency savings account but, forgot to put it on your calendar.
Two months pass by, and a new emergency happens. Now you think you have been depositing and haven’t. Plan and follow-up, don’t let it happen to you.
Remember that the emergency fund account is there for an emergency, and you want to ensure you have enough available. Do not make the mistake of forgetting to replenish your fund.
Avoiding the mistakes many make when it comes to emergency savings funds is fundamental to a great savings plan.
We have met many people, including ourselves, who have made some of these or even all of these mistakes. The most important thing you can do is become educated so you and your household can avoid these similar mistakes.
Remember, saving and planning takes constant attention to detail. Take it day by day, and remember now you know what to do and what not to do.
Keep a good handle on your records and adjust your savings. Starting an emergency fund prepares you and your family for those situations we wish would never happen.