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.
7 Questions to Ask Yourself to Be Better With Money
Reaching goals can be hard and it just doesn't happen by accident, we have to actually put in the work. So whether it’s running a marathon, eating healthier or getting that next promotion at work, a plan is laid out so we know, how am I going to get from A to Z? The same works with reaching financial goals or simply getting rid of stress around money.
For example, if you want to increase our savings for an emergency fund, you have to determine, how much money am I going to need? From there, how much can I afford to set aside each month? Then you have to set that money aside and actively not spend it unless it’s an emergency.
Below are 7 questions to ask yourself so you can stay on track with your goals and crush it with your finances.
What can I do to increase my income?
I am sure you know by now but the side hustle game is real! It has never been more important to have diversified income because a job is not forever. There are so many options today so get creative, try selling something you enjoy making, teach or consult in your area of expertise or pick up some dog-walking clients.
Can I afford to pay more towards debt? What would my budget look like without debt?
If you are making your monthly payments on debt I would push you to see how much extra you can afford each month, especially on high-interest debt. By making only the minimum payments we are paying more in interest and increasing our chances of disaster if something were to happen with our income. Best bet is to pay it off as quickly as possible. And for a bit of extra inspiration, take a look at a life without those monthly debt payments, what else could you be spending that money on? Más vacaciones por favor!
Am I saving enough today to fund my vision for retirement in the future?
How much are you saving per month and are you on track for retirement? The answer is different for everyone, it depends on how much money you would like to have for retirement and how long until you want to retire. Use this calculator to see what your balance will be at retirement. If you haven’t bumped up your contributions lately you might want to look into that, 15% of your paycheck is a good goal if you don’t have high interest debt. Bonus credit if you want to reach financial independence at an earlier age, use this FIRE calculator (FIRE stands for Financial Independence Retire Early) to see when you can reach this goal!
Is my emergency fund all set or how much do I need to get it funded?
Having an emergency fund to fall back on will relieve a lot of stress in case a pandemic happens, an expensive car repair is needed or your furnace breaks in the middle of winter. A good rule of thumb is to have 3-6 months worth of expenses saved up and set aside in an account that you have easy access to. Don’t include unnecessary spending while calculating this number, it should only include what you would need to get by, we aren’t going on vacation during an emergency.
What are two of your big goals and do you have a plan to get there?
In order to truly enjoy life, we have to be sure we are doing the things that make us happiest. Sure we have to go to work and pay bills but outside of that, on the weekends or in your spare time, what do you enjoy doing most? Maybe you want to save up for a camper or you want to buy a cabin up north. Whatever it is, are you setting money aside? Do you know how much it will cost? Have you created a vision board on Pinterest to stay motivated? Ok, the Pinterest part isn’t necessary but it sure can be fun!
What system am I following to stay on track with my spending?
Just like we have to be intentional to reach our goals, we need a system in place to help us get there. Do you have a budgeting app to watch your spending? Do you use the cash-envelope system for categories you tend to overspend in? Do you log everything in Excel and update the pivot charts to see your savings progress? Whatever method speaks to you, put in some solid effort and you’ll be amazed how easy it will become.
Is there anything holding me back from taking action?
If you aren’t able to get started on the above items, why? Are you too stressed to even start? Do you not have a supportive partner? Does your debt seem too high to even begin to dream about retiring? Whatever it is, take one little step forward. Choose one thing that you can start to work on and begin there. You’ll be amazed that with a little support, it’s not as scary as you might have imagined!
If You Have Federal Student Loans, What's Your Plan?
May I extend my fullest congratulations to those with Federal student loans. You are granted, yet again, an extension to when your payments will resume.
Now let me put my overbearing mother-figure hat on and ask you, “what are you doing about it?” How are you improving your finances with this never-been-done-before miracle that has come out of a horrible time for our world?
These COVID relief measures mean much more than simply not having to make your payment. The bigger piece is that you are not accruing any more interest. Compound interest can be a wonderful thing when you are earning it, but it has the opposite effect when you owe it on a debt.
What happens if you continue to make your payments when they aren’t required? This breaks down to a $393 student loan payment (the national average) going directly to pay off the balance of the loan.
Normally a part of that $393 payment goes towards the principal balance and another part goes towards new interest that has accrued since your last payment. Your payment has less of an impact when you are also paying on interest, taking longer to pay off your loan.
Now I ask you again, what will you be doing with this newly awarded time? Are you paying off high interest debt? Are you using it to increase the amount saved in your emergency fund? Are you doing the work to get on a working budget while you have some wiggle room?
If you didn’t say yes to one of the above, I want to ask you ‘why not’? I am a true believer in ‘everything happens for a reason’ and if this wasn’t a huge wakeup call I don’t know what is.
We have been taking our health, relationships and finances for granted for decades now. I am not the first to write about what 2020 has taught us but I am here to reiterate it for those of you with federal loan debt.
How you focus your time and energy with your finances these coming months will have a major impact on the rest of your life, good or bad.
Are you going to continue to look the other way at your debt, knowing it will ‘get paid off eventually’. Or are you going to jump in the deep end, as hard as it might be, and create a plan to change your future for the better?
Get started with tracking your spending with this free tool to see where your money is currently going. We can’t change our futures unless we dig into our past.
Why You Might Not Need an Emergency Fund
This is a BOLD statement, I get that. But do you know why I say that? I think when we have a large buffer sitting in our bank account we become compliant and lazy with money.
When I only had $2,000 in the bank as my buffer when I was paying off debt that scared me. I was constantly thinking about some possible emergency that could happen and I would be screwed.
But do you know what happened? Nothing, I just worked my tail off to get out of debt so that I could start saving for an emergency and feel safe again.
Saving for an emergency was important to me because I wanted to know that if something happened, I was prepared. If I lost my job (which unfortunately we all know too well right now) I had time to find something I loved doing versus reacting to my new situation.
Don’t get me wrong, you should still have some money saved up while you are paying off debt, but let’s not save 3-6 months just yet
Here’s what you should do:
Save $1,000 for each member of your household before tackling debt
Once you have your minimal emergency fund, stay focused and on plan to pay off your debt
Once you are debt free, save 3-6 months of expenses and set it aside in a high yield savings account for a higher interest rate
How to Calculate How Much Money Should Be in Your Emergency Fund
Any good emergency fund consists of expenses that continue on during an emergency. While there are a few different scenarios in determining when we can tap into this savings, there is only one way to calculate it and it is pretty simple.
1. Housing - rent or mortgage, it also includes electricity, trash, water and those sort of bills. Netflix is not here, and if times are tough, neither is WiFi.
2. Food - groceries. Don't put your restaurant spending money or brewery adventures in your emergency fund calculations. This is how much money you need to put food on the table for your family. And if members of the house are still working, this includes packing a lunch (no going out to eat at work either).
3. Transportation - let's be realistic, even in a crisis you will need gas to go buy your groceries or to pick up kids from school. Maybe you take the bus, include your bus passes here instead. You aren't accounting for saving for a car in this fund or a repair that you want to get done in the future.
A proper emergency fund consists of 6 months of savings for the above items. Add up expenses for each month, times it by six and there you go! This money should live in a savings account that you have quick and easy access to. You are not trying to gain interest on this money, you are getting prepared for an unfortunate time in your life.
Reader Question: What Is the Best Thing to Do With Savings? Invest? What Kind of Account Is Best to Have It In?
A: This is a great question and it depends on the type of savings you are referring to! Let's assume you have no debt for this example. Your emergency fund should be in a separate account from your primary checking and it should be accessible. The point of this money is to get it when you need it so make sure it's in an account that doesn't require minimum balances or a specific amount of time that it has to be in the account. The purpose of this money shouldn't be to be making money so don't worry about the interest rate. You may see better rates with online banks, be sure you have a card to access the money.
With all of that, additional savings should be going into a Roth IRA. Personal finance coaches don't give investing advice so I would recommend you speak with a financial adviser on other account types. I would avoid single stock options if it was me.
If you don't have an emergency fund or you have debt, this should be your priority. Set aside $1,000 for each person in your household first. After that, work to pay off all your debt. Once your debt is paid, save six months worth of living expenses for your emergency fund. And that brings us back to the top!
Hope that helps!
What to Do With Your COVID Stimulus Check
So, this stimulus check. What about it?
First off, check out this link to see the details on how much you may be receiving. Amounts vary but are up to $1,200 for individuals and $2,400 for those filing jointly (with $500 per child also in the mix). If you are behind on child support you won't be seeing a check. You will receive this money via direct deposit or a check in the mail, depending on your last filing method.
What should you be doing with this money? I can tell most of you that the answer here won't be to spend it. There are a few easy scenarios to cover but if you think your situation is a little more unique you can always reach out.
If your job is stable, you are not worried about lay-offs or reduced hours, this money should go towards any debt you may have. Let's say you don't have debt, then it should go towards your savings. If you have a five month emergency fund you can always invest or, my personal favorite, make a donation to an organization that is doing some good right now.
If you are at all questioning your employment then it should go towards your necessities and any leftover funds should go straight to savings. What are necessities? Rent/mortgage, gas for your car, food and utilities. Netflix? Nope. It's only $8.99/mo - nope. Getting food to go because you can't stand to cook anymore? Nope. Birthday gifts for friends because you feel bad they are stuck at home? Nope. Nope. Nope. You lost all or some of your income, it's time to save every penny you can.
Be safe and be smart out there!