I Spent Money Out of My Emergency Fund, Is That Ok?
Emergency funds can be tricky because it isn’t always fun saving for the unknown, especially when we could be using that money for things we want to be doing right now. Present wants aside, they are crucial to ensuring you stay out of debt and can be lifesavers in reducing stress. Let’s dive into what exactly an emergency fund is, where you can keep it and what it can be used for. Hint hint, you can use it for really fun things too, keep reading!
What Is an Emergency Fund
An emergency fund is simply a pile of money that you have set aside to help take the pressure off when you run into, well, an emergency. An emergency can be anything from your car needing a repair or your furnace going out in the middle of winter. Let’s qualify an emergency as something we can’t predict might happen and so by having money set aside for these unpredictable events we are reassured that we cover the cost without going into debt.
It is recommended by the powers that be that we have anywhere from three to six months worth of expenses saved to have a fully funded emergency fund. The amount you decide to save will depend on how expensive your lifestyle is, how steady your income is and how secure it makes you feel to have a little cushion in the bank.
Where Should You Keep Your Emergency Fund
Since you are going to want to have access to this pot of money, you will want to be careful where you keep it. Long-term investments such as a bond or your 401k is a bad idea because these investments take time to see any sort of return.
In order to keep the money liquid, a fancy way of saying accessible, I recommend keeping it in a high yield savings account (HYSA), here are some good options. Now if you are thinking, what’s the difference between a HYSA and a regular savings account, don’t worry, I got you! Basically a HYSA offers higher interest rates on the money in your account so you are earning more than you would with a traditional savings account. Normally these accounts are with online banks without the costs of a brick and mortar so they are able to pass on this savings to you in the form of higher interest rates. Another bonus of a HYSA is that since they are online it can add an extra layer of protection against you spending that money, just don’t carry your card around. More info here from an earlier blog post where I went further into detail.
When to Spend Emergency Fund Money
Ok so you have this pile of money sitting aside, earning decent interest, when are you allowed to use it? The hard part about this question is this, personal finance is just that, personal. You get to determine when and how you use this money, which can make things a little ambiguous.
So I recommend this, after you determine how much money you need, set some rules around when you get to use it. Does a flat tire count or should that be taken out of an auto maintenance category? How about that coat you have been eyeing up at Macy’s? Set some real guidelines while allowing yourself to be flexible. While you are building up this savings you may need to dip into other funds like vacation or restaurants if an emergency does pop up, and that’s ok.
OK now I am going to go against everything I just said, you ready? I truly believe in not guarding your money in a way that you believe spending money is losing money. What I mean by that is if you think every time you spend money that that money is gone forever, there may be some mindset work to tap into. I will be the first to admit that I was that way for years and up until recently I have totally shifted my mentality on this subject. If you are looking for a good book that dives more into this, I recommend You Are a Badass at Making Money. Basically, if an opportunity arises for you to better yourself, better your business or simply take a leap that just feels right in your gut, then spend the money. My partner and I recently made the choice to spend a good chunk of our emergency fund on a business coach for me. This was not a simple decision but after thinking about it and having multiple conversations, we truly felt the impact making this move could have on my business. I’ll tell you this, agreeing to the payment was the hardest part and I don’t regret spending that money at all.
Keep Your Emergency Fund Stocked With Cash
If you’re like me and dipped into that savings then pat yourself on the back because that is exactly what it is there for! Give yourself a moment to breathe because chances are dipping into this fund wasn’t easy and possibly something you didn’t want to do. After all of that, take a look at your budget and see what areas you can pause or reduce spending in to bring that emergency fund back up to your target amount. Remember, this is only temporary and it’s really important to build it back up to ensure it’s ready for you when you may need it next.
