Common Emergency Fund Mistakes Families Should Avoid
Life’s journey is filled with uncertainties, including inevitable surprises that can leave us unprepared. Whether it’s our car malfunctioning, facing an unexpected health crisis, or suddenly experiencing job instability, these difficult situations underscore the importance of maintaining a substantial emergency fund. More than just a financial precaution, it acts as a crucial support during times of need.
Families, in particular, need to be prepared in the case of a financial emergency to ensure their kids are always protected, and an emergency fund can play a significant role here. However, the path to creating an emergency fund is fraught with common mistakes many families inadvertently make. Here are some common emergency fund mistakes families should try to avoid.
Underestimating the Emergency Fund Size
If you save a certain amount of money thinking it’s sufficient, but a significant medical expense arises, there might be a financial gap. A prevalent error among families is undervaluing the required size of their emergency fund.
Aim for three to six months’ living expenses when saving money to create an emergency fund. Consider your family’s unique circumstances, such as the number of dependents and job stability. Adjust the target amount accordingly to ensure you’re adequately covered.
Not Prioritizing High-Interest Debt
It’s tempting to funnel all your extra cash into your emergency fund, but if you’re carrying high-interest debt, you might be doing yourself a disservice. Ignoring debt while building an emergency fund can lead to paying more interest over time.
Strike a balance between building your emergency fund and paying down high-interest debt. Start by focusing on the most expensive debts, such as credit cards, while maintaining a small emergency fund. Once high-interest debts are under control, allocate more funds to your emergency fund.
Ignoring Regular Fund Assessments
Life evolves, and so do your financial needs. Ignoring regular assessments of your emergency fund can be a costly mistake. What might have been sufficient a few years ago might not cover your current expenses.
Re-evaluate your emergency fund at least once a year. Consider factors like changes in income, new family members, or alterations in living expenses. Adjust your fund size accordingly to ensure it remains a reliable safety net.
Tapping into the Emergency Fund for Non-Emergencies
The band you love is performing locally, and tickets are rapidly running out. While the urge to use your emergency fund for non-essential indulgences is strong, doing so contradicts the fundamental purpose of having a reserved fund for unexpected situations.
Clearly define what constitutes an emergency. Unexpected medical bills, car repairs, or job loss are emergencies. Non-essential purchases or planned vacations should be funded separately to avoid compromising your financial safety net.
If you’ve previously used your emergency fund for non-urgent matters and find yourself lacking sufficient savings, it’s crucial to devise an alternative strategy for prompt access to funds. In such circumstances, you might explore the option of obtaining a personal loan. Thanks to technological advancements, you can apply for your personal loan online and find out if you are approved within minutes. If approved, you may be able to get your funds as soon as the same business day. Once you’ve received this money, use it towards emergency expenses and create a payment plan to ensure prompt payments and avoid late fees from hurting your credit score.
Investing Emergency Funds in High-Risk Assets
Some families make the mistake of investing their emergency funds in high-risk assets, hoping for higher returns. While investing is crucial for long-term goals, emergency funds should prioritize liquidity and stability.
Keep your emergency fund in low-risk, easily accessible assets like a savings account or a money market fund. These options provide liquidity, ensuring you can access your funds promptly in times of need.
