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.

You Can Be Earning Cash, on Your Cash!

Not to start off with a cliché Alber Einstein quote but “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” I lead with this because not only is it so true, but I'm willing to bet you’re paying interest on something as you are reading this (and probably on a few things).

But there is hope! The easiest way that anyone can take advantage of compound interest is to start a high-yield savings account. If you are asking yourself, ‘what the heck is that’ then you are in exactly the right place.

A high-yield savings account features a higher interest rate and generates more returns, which is a fancy way of saying that it gives you more money back for just having money in the bank. Yes, real money, not rewards or points.

Money.com goes into detail explaining that, “unlike other methods of generating returns, such as investing in the stock market, putting your money in a high-yield savings account poses little to no risk...if you’re going to hold cash, you want to seek out a bank that has consistently competitive rates to maximize earnings on that cash.”

Pro-tip, since the amount of interest earned depends on the amount of money you have in the account, be sure your savings for larger purchases are in this account, such as a down payment for a house, vacation fund or your emergency fund.

Here are how the numbers break down. If you had $2,000 in a checking account with a standard APY of 0.06%, you would earn $1.20 over the course of a year. In a high-yield savings account with a 1% APY, you would earn $20 a year.

Be sure to read the details of your high-yield checking account, they all are a little different. They will have different interest rates, requirements on an initial deposit or minimum balance and some might even have fees. 

Here are some examples of some accounts you may want to look into but be sure to do your research and find an account that will fit your needs!

Habits of a Millionaire, Just in Time for the Holidays?

Let’s get straight to the point. Budgets are the key to building wealth and while you might know the importance of one, I don’t know if you are giving them as much credit as they deserve.

Ramsey Solutions, the Dave Ramsey empire, conducted the largest survey of millionaires, with over 10,000 participants, all to find out what some of the common trends were. 

Here is what they found:

• 8 out of 10 invested in their company 401k

• 79% did not receive an inheritance

• Only 31% averaged $100,000 a year over the course of their career (and one-third never had a six-figure salary)

• The average millionaire made a habit of budgeting every month

Since the holidays are here, and 52% of us Millennials are going into debt because of it, I’m here to offer a solution. Don’t wake up in January with your credit cards maxed, desperate to cure your holiday hangover, let’s change the path you might be headed down.

Here is a free, easy-to-use template to get your holiday budget created today! Use this spreadsheet to organize your holiday spending categories, assign dollar amounts to avoid debt and record your transactions to help you stay within budget!

While this year’s budget may not be fancy, we only have a month until the big holiday so let’s be realistic with how much you can save, I want you to know that it’s ok. 2020 has tested us, pushed us and prodded us to act differently. 

So here we are, creating a budget, changing our spending habits and building a future for ourselves because we deserve more than just going to work and paying our bills. Thanks 2020 for the wakeup call.

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!