When to Tap Your Emergency Fund
By Melissa Tosetti
What’s a financial emergency?
When we create Spending Plans for clients, we do our best to include their anticipated expenditures throughout the year – everything from the expense of preparing their taxes to auto repairs and maintenance. The goal is to have money set aside in anticipation of those expenses. To an extent, you could consider those funds placed in a “holding account” rather than a “savings account” because the intention for that money is to be spent on anticipated expenses.
So, then what is that Emergency Fund for? Well, emergencies!
Job loss or reduction in income
Medical emergency (person or pet)
Seemingly healthy car or appliance dying
The important thing about an Emergency Fund is to create rules for when to tap it. This works on the flip side as well. We’ve had clients who, prior to working with us, have had emergencies and a savings account to cover the emergency, but put the expense on a credit card. They programmed themselves “not” to use those funds, but neglected to create a script for when “to” use those funds.
Another important consideration about your Emergency Fund - at The Savvy Life, we strongly recommended keeping your Emergency Fund separate from your other savings/holding accounts. When money for your saving goals is combined, it’s too easy for them to become tangled. When pulling money for your next vacation, you may accidentally dip into your Emergency Fund. Or, as has been the case for many clients, you may feel guilty pulling that money for your next vacation, even though you’ve saved for it, simply because it’s in the same account as your Emergency Fund.
If you don’t already have an Emergency Fund set up, now is a perfect time to start one. Capital One 360 is one of our favorite resources. It allows you to set up multiple accounts and even name them.
If you’ve tried and struggled to successfully save to your Emergency Fund, consider starting by saving just 1% of your take-home pay and then building the percentage saved every few months. We’ve advocated this strategy for years and it’s been a game changer for clients and readers of The Savvy Life. It’s a path for baby stepping your way to financial security.
Melissa Tosetti is a cash flow planning expert, founder of The Savvy Life and author of the international bestseller Living The Savvy Life.
For the past eight years, she’s worked with over 625 individuals and families to create Spending Plans.
To learn about the Spending Plan process, visit The Savvy Life’s Home Page. If you’d like to learn about how The Savvy Life works with financial advisors and their clients visit: The Savvy Life Advisor’s Page.