Creating an emergency fund is certainly important, but spending it wisely when the time comes may be even more essential. Poor decisions may make an emergency fund much less effective, or require a much greater sum to be amassed.
As was discussed in my short-term savings post, a general goal is to have three to six months’ worth of living expenses in an easily accessible form such as a savings or a liquid investment account. To reach that goal you need to know how much you actually spend each month and which of those expenses are truly necessary.
The first problem that often arises with emergency funds is that they are accessed for non-emergencies. Losing your job, incurring an unexpected medical expense, or facing foreclosure on your home are all examples of true emergencies. Wanting to go on an expensive vacation, upgrading your wardrobe, or financing the purchase of the latest gadget are a few examples of things that are certainly not reasons to access your emergency fund.
A second problem is that once emergency funds begin to be used, they may seem like a way to maintain your current standard of living. A better method is to use the spending of your first emergency fund dollar as a wake up call to drastically cut many of your normal expenses. You may need to go into financial survival mode at that point. The day I ever dip into my fund I would also cancel many of my discretionary services. I would only keep things that would help to reduce the duration of my emergency, such as Internet access if I was using it for a job search.
If you don’t have an emergency fund, consider starting one today. If you already have one, ensure that you only access it for actual emergencies. Once an emergency arrives, spend wisely and cut expenses to make your prudent planning last as long as possible.
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