Published in: Banks | Nov. 1, 2019
4 Mistakes Not to Make With Your Emergency Fund
By: Maurie Backman
You need money for a rainy day, and avoiding these blunders will help ensure that it’s there for you at the right time.
It happens all too easily: Your car breaks down without warning. Your heating system decides to stop working. You trip, break an ankle, and find yourself out of work for a number of weeks with a pile of medical bills to boot.
Surprise expenses are not only a drag, but also a danger to your finances. If you don’t have the cash on hand to pay for them, you risk racking up scores of debt. You can avoid that scenario, however, by establishing an emergency fund. But if you’re going to make that effort, be sure to avoid the following mistakes.
1. Saving too little
A solid emergency fund contains enough money to cover three to six months of essential living expenses -- things like your rent, car payments, food, utilities, and so forth. But if you fail to hit the lower end of that threshold, you’ll risk coming up short when a larger bill lands in your lap, or you find yourself out of work for a period of time. Of course, saving some money is better than saving nothing at all, but ideally, you should aim for a minimum of three months of living costs.
2. Keeping that money invested
Investing in stocks is a great way to grow wealth. But the stock market is no place for your emergency fund. The reason? You need to be able to access that money in a pinch, but if you put that cash into stocks and then need to make a withdrawal when the market is down, you risk taking permanent losses. A better bet? Keep three to six months’ worth of living expenses in the bank, but put the rest of your money into stocks, or other investments that come with risk but offer higher returns.
3. Not putting that cash in a high-yield savings account
Just because you shouldn’t invest your emergency fund doesn’t mean you shouldn’t earn as much money on it as possible. If you stick that cash in a regular old savings account, you may find that you earn 1% interest on it or less. That’s why it pays to look into a high-yield savings account instead. At today's rates, you're looking at an APY of close to or just over 2%.
4. Tapping it needlessly
The purpose of an emergency fund is to serve as a source of cash when unplanned bills arise -- which is why withdrawing from that account in a non-emergency situation is a dangerous move. Tempting as it may be to tap that account to pay for a vacation or finance an electronics purchase, if you go that route, you’ll risk a scenario in which you don’t have enough money for an actual emergency, like car or home repairs. Therefore, pledge to leave that cash alone, and open a separate savings account to sock away funds for other purposes or goals.
Your emergency fund could be your lifeline when unplanned bills hit you hard. Avoid these mistakes, and with any luck, you’ll manage to stay out of debt in the face of unanticipated expenses.
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