You can never be sure what will happen in life, but you can at least prepare for unexpected situations by establishing an emergency fund. These savings should be separated from your regular savings and ideally should cover living expenses for three to six months. If you cut your paycheck, lose your job, or face significant unplanned expenses, your emergency savings can be used as a life raft without the need for a credit card. Regardless of your age, income level, or living conditions, it is essential to have significant savings to meet unexpected expenses. Ideally, you should have sufficient funds to cover living expenses for three to six months from the emergency fund. That way, if you lose your job or if an unscheduled bill, like a car or house repair, falls into your lap, you don’t have to resort to debt to deal with the situation. If you have established an emergency fund, congratulations, you are in a good position. But here are three things you should never do with this money.
1. Invest It
Ultimately, investing in assets like stocks or cryptocurrencies can be an excellent way to increase wealth. But when it comes to your emergency fund, the best place to store your cash is the bank. When you deposit money into a savings account, assuming your deposit does not exceed $ 250,000, thanks to the FDIC, you can ensure that you do not lose principal (the original amount you deposited). When you invest your money, if something goes wrong, you may lose some or all. This is a risk you cannot take by saving money for emergencies. Work is needed to create a contingency fund. It can take some people years to keep three to six months in living expenses. If you’ve accomplished this feat, don’t waste your non-emergency savings by throwing it away.
2. Tap It
It’s one thing to use your emergency fund when your car needs repairs or if your water heater is broken and you need to spend $ 2,000 to replace it. But withdrawing funds for non-emergency situations, like vacations or buying new furniture, is a bad idea. While it may be tempting to use up your hard work money if you run out of emergency savings and then run out of high expenses, you put yourself at risk of going into debt; An emergency fund is one thing designed to help you avoid this. If you can’t afford non-emergency expenses, try setting them aside and reserving them separately.
3. Loan It
When a friend or family member comes to you for a loan, it can be difficult for you to turn that person down, especially if you have a large amount of cash in your bank account. However, while it is noble to help someone close to you, if you use your emergency fund to make a loan to that person, you may be in trouble if you face your financial problems in the future. It is best to help this friend or family member find other loan options, such as applying for a personal loan.
Work is needed to create a contingency fund. It can take some people years to save three to six months in living expenses. If you’ve accomplished this feat, don’t waste your non-emergency savings by throwing it away. Instead, avoid the steps above to keep your funds available when you need them. If you need to use an emergency fund, replenishing it is vital so you can save it the next time you need it. After struggling financially, you may even decide to keep more instead of the usual 6-month recommended living expenses. Reducing monthly payments can make room in your budget to rebuild your emergency fund. If necessary, other financial goals can be postponed for several months until the security system is restored to a comfortable level.