According to a recent survey, “approximately 62% of Americans have less than $1,000 in their savings accounts and 21% don’t even have a savings account.” The reasons vary. Some people feel they can’t afford to save, whereas others downplay the importance of saving or put it off until later.
But while some households lack a sizable savings account, you might have an emergency fund for life’s unexpected surprises. It might not be a six or eight-month fund, but it’s more than the average person’s account.
Building an emergency fund from nothing takes time and effort. In fact, this might be your hardest financial challenge. But the challenge of growing a cash reserve may not compare with the willpower it takes to keep money in this account.
After sacrificing extras and luxuries to build your account, it’s tempting to dip into your emergency savings. The occasionally teeny-tiny dip may not have a huge impact in the long run, but you can run into problems if you’re unable to keep your paws off the account. It doesn’t matter if it’s been years since a “real emergency,” the worse thing you can do is deplete (or nearly deplete) your funds. The more cash you have, the easier it’ll be to survive rough times. Fortunately, there are several tricks and strategies to ensure you always have enough in the account.
1. Understand the Definition of an Emergency
It’s important to understand what an emergency is, and what it’s not. An emergency is when you need immediate funds to take care of an urgent matter. This is a situation that you can’t put off until a week or later. You need cash, and you need it now. Maybe you lost your job or can’t delay a home or car repair due to the risk of complications. Or maybe you need to pay off a creditor immediately to avoid a collection account. An emergency fund, on the other hand, is not a backup plan for when you want to have a good time with your friends or an extension of your income.
At the end of the day, it’s your money and you can do what you want. But if you start taking money from this account for non-emergencies, you may not have enough cash for a real emergency, at which point you might have to rely on credit cards.
2. Get a Separate Account for Other Expenses
Money in an emergency fund should only be used for an emergency—period. If you have other plans that require a large sum of cash, such as buying a house, a vacation, or home improvement projects, set up a separate savings account for these goals.
Understandably, your money only goes so far. What you can do is deposit half or a third of your disposable income into your emergency fund and the remaining funds into a separate savings account. This way, you can continue to grow your emergency fund while planning for other goals.
3. Don’t Make It Easy to Access the Funds
Keeping your emergency savings account in the same bank as your checking account is asking for trouble. The accounts are probably linked, which makes it easier to take money from your savings. You should keep your emergency fund as inaccessible as possible, preferably with a bank not directly tied to your checking account.
Consider opening an online-only savings account for emergency funds. You can link these accounts to a brick and mortar bank, but since it takes a couple business days to complete a transfer, having an online savings account helps curtail impulse buys and needless withdrawals. This also means that you won’t have access to same-day cash in the event of an emergency, so take this into consideration before opening an online savings account. However, if you’re more concerned with minimizing impulse withdrawals than same-day cash, an online savings might be the way to go. Plus, these accounts usually earn a higher yield than other types of savings accounts, helping you get a higher return on your money.
4. Don’t Stop Adding Funds to the Account
Hitting your goal of a three to six-month cash reserve doesn’t mean you should stop building your emergency fund. You don’t need to add as much to the account every month, but you’ll want to continue growing this account. You don’t want a single emergency to completely wipe out your funds. By continuing to add money to the account, you increase the likelihood of having a surplus once you take a big withdrawal.
5. Tap Your Account as a Last Resort
If you need a car repair, your first impulse might be to take money from your emergency fund. But while your vehicle needs attention, does it require immediate attention? If not, could you possibly hold off a week or longer until you receive a few more paychecks? If you save up, you might avoid tapping your emergency fund altogether.
Of course, you can always borrow from your savings and pay yourself back. But even if you have good intentions, those funds might never make it back into your account. Therefore, tap your rainy day fund as a last resort.
6. Don’t Use Your Funds to Solve Other People’s Problems
Your emergency fund is your personal financial backup plan and not a solution to everyone else’s financial problems. It’s loving and kind to help a friend or relative going through hard times, but you have to consider the impact on your personal finances. Will helping this individual put a serious dent in your emergency fund? Do you doubt this person’s ability to pay back the funds? This is your choice, just make sure your decision isn’t entirely based on emotions. As a rule of thumb, only lend what you can afford to lose.
If you haven’t begun saving, now’s the time to get serious. Commit to paying yourself first and save every windfall you receive. And if you already have an emergency fund, never stop funding to this account.