44% of Americans Are Focused on Emergency Savings: 4 Things To Never Do With That Money
Written by
Yaël Bizouati-Kennedy
Edited by
Molly Sullivan
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It’s no secret that saving money in a consistent manner and starting to do this as early as possible is paramount to your future financial well-being, as well as your peace of mind. And while there are a variety of ways to save, one of these is setting up — and then beefing up — an emergency fund, which experts recommend to represent at least three to six months’ worth of living expenses.
A new GOBankingRates survey found that Americans are on the right track when it comes to setting such a fund, as 44% of them make this the top priority when it comes to what they are saving for. This is followed by saving for retirement, with 19%; saving for a house, with 13%; saving for a vacation, with 8%; and saving for a car, with 6%.
Yet, while setting up an emergency fund is crucial in case of rainy days or unexpected events, not dipping into it is another matter altogether.
“Your emergency fund is just that, it is for emergencies,” said Jay Zigmont, PhD, CFP, founder of Childfree Wealth. “Emergencies are unplanned events by definition. You use your emergency fund to cover needs, not wants. For example, if your roof is leaking, that is a need. On the other hand, remodeling your kitchen is a want. You may want a new car, but need basic transportation.”
Zigmont said that the key is to have enough money for emergencies, no more and no less, with the general guideline being three to six months of expenses in your emergency fund.
“If you have more than six months of expenses in your emergency fund then you may want to move the rest towards your goals,” Zigmont said.
Here are a few things you should never do with an emergency fund, according to experts.
Never Use It on Nonessential Spending
While “never” will depend to some degree on each individual’s or family’s situation, as what’s an emergency for one person won’t be for another, there are specific instances where you should not dip into it, said Austin Kilgore, an analyst with the Achieve Center for Consumer Insights.
These can include vacations, going out to dinner, going to the movies and even replacing worn-out furniture, he added.
Several experts echoed the sentiment, emphasizing that the most cardinal rule regarding your emergency fund is to reserve it strictly for genuine emergencies, refraining from utilizing it for non-emergency expenses.
“A promotional offer on airline tickets or hotel rates does not qualify as an emergency,” said Collin Plume, founder and CEO of Noble Gold Investments. “Similarly, a price drop on running shoes you’ll need in about six months or tickets to a Beyonce concert are not emergencies. True emergencies pertain to life-and-death situations, safety and freedom.”
Never Use It for Essential Expenses That Are Not Absolutely Urgent
As Achieve’s Kilgore explained, your furnace going out mid-winter when you live in Montana would be one situation where you need to act, but other appliance replacement might not fall under the same category.
“Yes, you need to replace it immediately, and using the emergency fund savings to do so may be necessary,” he said. “On the other hand, if there’s a great sale on the new washer and dryer you’ve been eyeing, but your current ones are working, that’s not a reason to dip into the emergency fund.”
Never Use It for Recurring Expenses
These can include monthly, annual, quarterly and semi-annual expenses.
“You know that the auto insurance bill, for instance, comes twice a year, you know when holidays and birthdays occur. For these expenses, you must save some each month — use a regular household budget to help — so you’re ready when they come up,” Kilgore said.
He added that it’s very important to have a plan to replenish the emergency fund if and when you do need to dip into it.
“If you use your emergency fund savings for a true emergency, it must be built up again to its previous level,” he added.
Never Use It To Keep Up With Inflationary Prices
With the recent bout of inflation, it has been difficult for many Americans to set aside emergency savings.
“In fact, now that pandemic stimulus savings are nearly gone and student loan payments are about to kick back in, I would bet that a substantial number of people will be dipping into, rather than contributing to, their emergency savings,” said Peter C. Earle, economist, American Institute for Economic Research.
With prices creeping up in every facet of our lives, it’s challenging to leave an emergency cash stash untouched, he said.
In turn, some experts recommend that one of the best ways to keep oneself from digging into emergency money is to make access to it more difficult. For instance, set up the emergency fund in a different account that you don’t usually think of or have it in a totally separate bank account.
“The best place to save one’s emergency money is typically going to be in a bank. One wants to be sure that the money is liquid and that it is not susceptible to volatility,” said Sebastian Jania, owner of Ontario Property Buyers.
He added that for these reasons, having money locked up in an investment vehicle is not recommended for an emergency fund as it may not be very liquid, it may take time to remove from the brokerage account and may be susceptible to volatility that one is not comfortable with for an emergency account.
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