Emergency funds are one of the first steps in confident money management. By having a stash of cash you can draw on when things go wrong (like having your car totalled or an unexpected lay-off) you can approach the rest of your financial life with confidence.
Here’s six of the biggest emergency fund myths that could derail your spending.
I should invest my emergency fund
Investing is a great way to grow your money in the long term. While risky investments may boom in the short term, safer investments grow slowly and cannot be easily withdrawn from without penalties. Your emergency fund should be held in cash, preferably in a high interest savings account, where it is out of sight, out of mind, but can be tapped in an instant.
I should save as much as possible!
While saving as much as possible is an admirable approach, nothing is worse than setting yourself unrealistic goals. Emergency funds typically hold enough money to tide you over for a few months if you lose your job. Finding that kind of cash doesn’t happen overnight. Instead, set up small, regular, automatic payments from your checking account to your savings account. Make sure it is a comfortable amount so you don’t need to pull money back to cover you until your next pay check.
I’m too young to save!
Youth is the best time to begin saving! While you might want to live it up with your first pay check, setting good behaviours now will make all the difference in the long term. Plus when you are young having a healthy emergency fund can be the difference between chaining yourself to a job you hate, and taking a risk and starting that micro-brewery you’ve always dreamed of.
Your emergency fund should be enough for six months spending
This is both true, and false. When you are employed with a healthy income it’s easy to relax the budgetary belt a little. If you find yourself suddenly unemployed, you may be able to tighten your belt and lower your expenses until you can find another job. However, if you work in a very specialised area with only a few vacancies, finding a new employer may be tricky and you may want to hold more than six months.
Six months of expenses is a good starting point, but depending on your circumstances you might want to adjust that number up or down.
I have too much debt to start saving
While paying down debt as quick is possible is crucial to a healthy wallet, it won’t help you in the event of an emergency. If you break a limb and are unable to work for six weeks, you’ll have trouble pulling money back from your car loan. Pay down credit cards (because you can use them in desperate times) and then make saving a priority. That way when the worst happens, you won’t have to go further into debt.
I can’t use my emergency fund!
The number one struggle people have with emergency funds is knowing when to spend them! After months of saving to build up that buffer it can be hard to separate with the money. Remember that your emergency fund is there for emergencies. While new shoes aren’t an emergency you should feel no guilt about using the money to repair a broken down car, or an unexpected bill. Just remember to build the fund back up afterwards!
How about you? What emergency funds myths have you fallen for or heard about? Any tips for setting up an emergency fund?