Are You Fooling Yourself About Your Emergency Savings? Here's How to Know

I've spent six months fooling myself into thinking I was strengthening my safety net. Every month, I sent money into what I believed was an emergency savings account. But the truth is, I was saving up for something else entirely.

When you fool yourself about your emergency savings (like I did), you all but guarantee that you'll set your safety net ablaze in an inferno of spending. That's not good. You could end up emptyhanded when you need it most.

Your emergency savings account keeps you safe

An emergency savings account, also known as an emergency fund, protects you from the unexpected. In order to be most effective, that must be its only purpose.

For example, a smart saver does not draw from their emergency fund when they must pay rent. They do draw from their emergency account to cover the insurance deductible on a wrecked car before their car insurer kicks in and covers the rest. That way, they don't take on debt to pay for repairs.

By using your emergency fund the right way, you avoid taking on debt to pay for disaster relief. That includes relief for injury, damaged property, and living expenses while between jobs. It's cheaper to pay for all that with money in your emergency fund.

How to know if you're building an emergency fund

Can you predict with 100% certainty where those savings are going to be spent? For example, on a phone, a down payment, or an investment? If the answer is yes, you're not building an emergency fund. Instead, you're saving for a purchase.

When I asked myself this question, I realized I could predict exactly where my money would be spent: on a down payment for an apartment. I was saving for a planned expense. That distinction matters: I now know I must reduce my risk in other ways (like shrinking monthly spending) to strengthen my safety net to where I feel comfortable. Had I spent my so-called emergency fund on a down payment, I would have tripled my risk, with no backup plan.

It's okay to save for a planned purchase or other expense -- in fact, doing so is a great way to avoid going into debt. It's also important to be clear about what you're actually saving money for. That way, you can plan for your future with clear eyes (and a thick wallet).

How to save money fast and safely

Saving up money keeps you from needing to take on debt to make big purchases. Typically, paying off debt is more expensive than paying for purchases upfront. To save money fast, you can make a couple of adjustments to your game plan:

• To earn faster: you can deposit money into a high-yield savings account.
• To earn safely: you can set up automatic deposits.

I've done both to save for tax season. It's made my life easier -- I save 100% of what I need for taxes automatically, and I get paid interest. The less I have to think about money, the better. I separate this money from other savings goals, like moving into a new apartment.

I put my move-out money in Titan Smart Cash. It's similar to my high-yield savings account, with two main differences: interest payments are higher, and it's less liquid than my savings account. If I want to build an emergency fund, I'll open a third account.

Bottom line

By fooling yourself about your emergency savings, you regularly torch your financial safety net and make financial plans on false assumptions. Be clear about what you're saving for -- an emergency? Or a purchase? That way, you can build financial security for when you need it most.