An emergency fund is a fantastic tool that can be lifesaving against income loss or financial emergency cases. Having a set amount of money aside for use only when necessary, can be the difference between paying for emergencies and being forced into debt. For this reason, an emergency fund must be used correctly.
This article looks at five ways to make your emergency fund go further and four things you should avoid.
How to use your emergency fund
When building and using an emergency fund, you must understand fully what it is and how to use it correctly. Let us look at how you could use your emergency fund to make it work for you and conserve your funds as much as possible.
Tip 1: Always Replenish Whatever You Take from It
As you will likely use your fund to pay for a considerable expense or substitute months of income, it must contain as much as you expect to need.
Therefore, whenever you take money from it, be sure to top it back up. In the event of an income loss, this may not be possible right away but replenish it as soon as possible.
Replenishing your fund is particularly important if you must use it for large purchases that take up a chunk of your money.
This may take longer to do, but it must get done eventually. You do not want to face another financial emergency and have nothing to fall back on, so keep track of how much is in your fund.
Tip 2: Keep Your Emergency Fund Somewhere Accessible but Separate
In times of emergency, you must have easy access to your money, so it is sensible to store it somewhere you can realistically access it. A savings account is an excellent place to start but be sure it is one you can draw from when you need to, as some savings accounts do not allow withdrawals.
Let us look at the kind of account you should be looking for when you need an emergency fund. To help you keep your emergency fund growing, you can choose a savings account with a high yield to earn interest as you add to it.
Most high-yield accounts also allow you to get your money quickly, which makes them great for an emergency fund.
However, there is an important caveat. Your emergency fund is likely to be a large amount of money, and the temptation to spend from it can be overwhelming at times – especially if you keep it alongside your regular bank accounts.
So, it is sensible to open your emergency fund account with a different provider, so you do not see it every time you spend.
Tip 3: Use It Only When You Have No Other Options
The point of your emergency fund is that you can turn to it when you are in an actual emergency. Think medical expenses, job loss, or homelessness.
Therefore, it is crucial that you only turn to it when you have no other options. If you have a regular income, your income should be the first thing you use to pay for things, not your emergency fund.
As we have seen, the temptation to spend from your emergency fund can be challenging, especially when it comes to big purchases.
However, it is essential to be mindful. You likely have good reasons for setting up your fund. You should try to be mindful of those reasons when the temptation hits.
Tip 4: Limit What Constitutes an Emergency
Your idea of an emergency will depend on your responsibilities and needs. It is important to have some ground rules.
For example, when it comes to big purchases, you might be tempted to play around with what constitutes a financial emergency. But what can feel like an emergency now is unlikely to feel that way when a true emergency comes along.
It is vital that when you are setting up your fund, you think about what would indeed constitute an emergency.
Take some time to figure out a list of things you might need money for and work your fund around that list. Your list will depend on your priorities. But a general rule is to think about medical bills, vet bills, and car trouble.
Tip 5: Make Your Fund a Priority
Your financial priorities are likely to be bills and debt, but make sure to set something aside for your emergency fund. While other things may take priority, your fund is still a significant financial expense that you should take as seriously.
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Remember that your emergency fund doesn’t have to take massive amounts of your monthly income. It can be as little as the amount you can afford to contribute each month.
However, your fund should be considered a substantial investment. You should make sure to put something aside each month, no matter how much.
What To Avoid Doing with Your Emergency Fund
It can be very easy to misuse your emergency fund, so consider how to use it and avoid making mistakes. Let us look at some things to avoid doing when building and using your emergency fund.
Tip 6: Do Not Include Money That Is Used Elsewhere
The money you put into your emergency fund should be entirely free to use when you need it. This means the money you intend to use for savings or pension contributions should not be used to build your emergency fund. Since that money is already allotted to something else, and likely cannot be used in an emergency.
It would help if you also tried to avoid relying on your credit card to pay for emergencies. It can be tempting, especially as credit cards are easy to access.
However, an emergency fund can save you from using one when unexpected purchases occur. With the money, you need to be sensible to avoid debt and the extra charges with your credit card.
Tip 7: Resist Other Financial Uses
Having a chunk of money set aside without using it can seem counterintuitive. Especially if you have other financial goals you are working towards.
You may be tempted to use your emergency fund to top up your savings or cover another financial goal, like saving for a house or contributing to retirement.
The critical thing to remember about your emergency fund is that you should consider it a different financial goal.
You should have a goal amount that you can turn to whenever. That does not mean you cannot continue to have other financial goals and contribute to them. But your emergency fund should be considered vital.
Tip 8: Learn the Different Between Accounts
An emergency fund and a savings account are two very different things. A savings account is likely to be used if you want to purchase something. An emergency fund is only used when you need something.
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It can be easy to confuse the two, as they are essentially chunks of unused money sitting around waiting to be used.
Understanding that wants and needs are two very different things is essential for having an emergency fund. However, it would help if you kept the two separate and ensured you turned to your emergency fund for needs rather than wants.
Tip 9: Avoid Using It for Planned Purchases
The point of an emergency fund is to have it there when you need it for unexpected purchases and expenses.
For this reason, it should not be used for purchases you know you will be paying out for. This includes a deposit for a house, car payments, or a holiday. These things might be necessary but are expected and should be planned for appropriately.
Summary
An emergency fund can be a lifesaving tool for anyone experiencing income loss or a financial emergency.
It provides the opportunity to pay upfront for emergencies without facing debt or unnecessary borrowing. So, anyone who is thinking about setting up an emergency fund must know how to use it properly and not waste it.
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