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
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.
What does Dave Ramsey say about emergency funds? ›
How Much You Should Have in Your Emergency Savings. Here's a Dave Ramsey principle we agree with: If you make less than $20,000 per year, aim to have at least $500 in emergency savings. If you make more than $20,000, then aim for at least $1,000.
Is $5,000 enough for emergency fund? ›
Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation.
Is $10,000 too much for an emergency fund? ›
Those include things like rent or mortgage payments, utilities, healthcare expenses, and food. If your monthly essentials come to $2,500 a month, and you're comfortable with a four-month emergency fund, then you should be set with a $10,000 savings account balance.
What does Suze Orman say about emergency funds? ›
Keep in mind that emergency funds can actually get too big, and Orman is particularly conservative in her recommendation that people save up to 12 months of living expenses. Once you've set aside 12 months in emergency savings, it's important to take the next step, and that's to begin putting your money to work.
What is the 50 20 30 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
Do 90% of millionaires make over 100k a year? ›
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
Is $30,000 a good emergency fund? ›
For the average American household, that's $15,000 to $30,0001 stashed in an easily accessible account. These funds will help you deal with an unexpected job loss, major medical costs, or other emergencies.
Is $20000 too much for an emergency fund? ›
A $20,000 emergency fund might cover close to three months of bills, but you might come up a little short. On the other hand, let's imagine your personal spending on essentials amounts to half of that amount each month, or $3,500. In that case, you're in excellent shape with a $20,000 emergency fund.
How many people have a $1,000 emergency fund? ›
Only 44% of U.S. adults would pay an emergency expense of $1,000 or more from their savings, as of December 2023 polling. 35% would borrow money, including 21% who would finance with a credit card and pay it off over time, 10% who would borrow from family or friends and 4% who would take out a personal loan.
A new Empower study reveals more than 1 in 5 (21%) Americans have no emergency savings — money set aside for unexpected financial events such as job loss, home and car repairs, and medical bills. Nearly 2 in 5 (37%) couldn't afford an emergency expense over $400.
What is a realistic emergency fund amount? ›
To prepare for income shocks, many experts suggest keeping enough money in your emergency fund to cover 3 to 6 months' worth of living expenses. So if you spend $5,000 per month, your first emergency fund savings milestone should be $2,500 to cover spending shocks.
Is 100k a good emergency fund? ›
Now if you happen to spend $20,000 a month, then sure, $100,000 is a reasonable amount to put in your emergency fund. But most of us don't spend that much on a monthly basis -- not even close.
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 is the only place you should keep your emergency fund money? ›
Bank or credit union account — If you have an account with a bank or credit union—generally considered one of the safest places to put your money—it might make sense to have a dedicated account where you can keep and maintain these funds.
Should I use some of my emergency fund to pay off debt? ›
The bottom line
It may or may not be wise to use your emergency fund to pay off your credit card debt. That depends on how much money you have set aside for emergencies and how much credit card debt you owe.
Should you keep your emergency fund money separate from your checking account? ›
Experts recommend keeping your emergency fund in an account that's liquid and easily accessible. It should be completely separate from your primary checking account so you aren't tempted to use it in a non-emergency.
