While it’s important to have an emergency fund, it’s also important to know how to use it wisely. See what things you should never use your emergency funds for.
Creating an emergency fund with at least $1,000 is the first and most important step on your journey to Financial Freedom. Having a separateEmergency Savings Accountis essential to cover unexpected expenses such as emergency medical bills, car repairs, or job loss. That way, you’ll avoid putting those expenses on a credit card and paying more interest in the long run.
While it’s important to have an emergency fund, it’s equally important to know how to use it wisely. In fact, there are some things that you should never use your emergency funds for:
Non-Essential Purchases
The first thing you’ll want to avoid using your emergency fund for is non-essential purchases. Non-essential purchases are things you want but can live without. For instance, buying new electronics when your current ones are still working fine or taking a luxury vacation.
Paying Off Debt
That’s right, you should even avoid paying off debt with your emergency fund. Before paying off debt, it’s important to achieve Money Milestone 1 of saving $1,000 for emergencies and Money Milestone 2, maximizing your employer’s 401(k)/403(b) match. Once you reach Money Milestone 3, create a long-term plan to pay off debt using theDebt Snowball Calculator.
It’s important to connect with a financial advisor and invest in your future, but it’s equally as important to keep your emergency funds liquid and accessible. Keeping them readily available means you’ll always have access to your emergency savings when the unexpected happens, and you need them most.
Everyday Expenses
Rent, groceries, or utility bills are things that should be included in a regular monthly budget. If you’re relying on your emergency fund for these expenses, find ways to reduce costs, like reducing the number of streaming services you have or planning out your grocery list in advance to minimize impulse purchases.
Home Renovations
While unexpected home repairs would be considered an emergency, home renovations should be budgeted separately. If you’re looking to update your home, create a home renovation fund in a separate savings account or CD to help you reach your goals.
Remember, your emergency fund is there to help you out when something unexpected happens, like a sudden expense or life event. By keeping a separate savings account and using it just for emergencies, you can make sure that you have a financial safety net and peace of mind when you need it most.
FAQs
Try to avoid using your savings on nonessential items and services, such as a vacation or entertainment expenses. Here's a good barometer: Consider whether you actually need something to survive. If not, think twice before using emergency fund money for the purchase.
What are five examples of reasons you may need an emergency fund? ›
We've all experienced unexpected financial emergencies—a fender bender, an unexpected medical bill, a broken appliance, a loss of income, or even a damaged cell phone. Large or small, these unplanned expenses often feel like they hit at the worst times.
What would count as a legitimate reason to use your emergency fund? ›
A death in the family requiring an immediate plane trip, a car accident, or a job loss all qualify as both unexpected and valid reasons to dip into your emergency fund.
What is the most common mistake made with emergency funds? ›
Mistake #1: You haven't saved enough
Remember, you don't need three to six months of all your expenses, just “must-haves” such as your mortgage or rent, utilities, taxes, and insurance bills.
How to not spend your emergency fund? ›
Keeping your savings separate from your spending. It can be tempting to dip into your savings as they grow. Make sure you: Keep your emergency fund separate from other accounts.
What is an example of an unexpected expense? ›
Unexpected expenses can include: Household Expenses: Plumbing or Electrical Emergencies. Appliance Repair or Replacement.
What is considered an emergency fund? ›
What is an emergency fund? An emergency fund is a separate savings or bank account used to cover or offset the expense of an unforeseen situation. It shouldn't be considered a nest egg or calculated as part of a long-term savings plan for college tuition, a new car, or a vacation.
What is the 50 20 30 rule? ›
One of the most common types of percentage-based budgets is the 50/30/20 rule. The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings.
Which is not a key to saving money? ›
The key to saving money is to: focus, make saving a habit and a priority, and discipline. Your income is not a key to saving money. Compound interest is interest paid on interest previously earned.
What are needs considered? ›
As you might expect, a need is anything that you genuinely have to have. These are essential things that you cannot go any significant period of time without. Food, shelter, and transportation fall into this category. They are the basics of daily living.
For example, a bathroom remodel is a want but a major leak is a need. Medical expenses can be another gray area. Necessary, unexpected medical expenses, like a trip to the ER, is a good candidate for using your emergency fund. Elective healthcare such as plastic surgery, which may not be an emergency, probably isn't.
What are the top 3 careers reported among millionaires? ›
Dave Ramsey on X: "Top 5 Careers of Millionaires: 1. Engineer 2. Accountant (CPA) 3. Teacher 4.
What would be at least one good reason why you would use your emergency fund? ›
An emergency fund is a bank account with money set aside to pay for large, unexpected expenses, such as: Unforeseen medical expenses. Home-appliance repair or replacement. Major car fixes.
What would you do if an unpredictable expense occurred and your emergency fund is not enough to cover it? ›
If an unexpected expense occurs and you do not have enough money saved, taking out a personal loan may be a good solution to get out of this predicament. A strong credit score can help you qualify for these loans, but it can also help you access other lines of credit in a pinch.
What is not a good reason to put your emergency fund in a CD or money market account? ›
While a CD can be a great place to store extra savings, it shouldn't serve as the primary savings option for your emergency fund. That's because if you need to withdraw your funds before the CD term ends, you'll pay an early withdrawal penalty (typically equal to a portion of the interest earned).
What is the main drawback of an emergency fund? ›
Drawbacks of Emergency Funds
By adding money to an emergency fund, it reduces the option of allocating any additional funds to other programs, such as retirement savings or paying down a mortgage. Thus, emergency funds reduce the likelihood of achieving other financial goals.
What should I use my emergency fund for? ›
An emergency fund is money you set aside for life's unexpected expenses, like car repairs, hospital visits and even job loss.
What assets should typically not be used to establish an emergency fund? ›
What assets should typically NOT be used to establish an emergency fund? The answer is U.S. government bonds. Bonds are not as liquid as other assets and are therefore not typically a good source of emergency funds. Money market deposit accounts are a good source for emergency funds.
What is the general rule for emergency fund? ›
While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
