You just finished planning your dream vacation to Europe. As you’re thinking about your future picnics in Paris and how good all those Belgian waffles will taste, you experience some car trouble. Your engine simply won’t start. After taking your car to the repair shop, you are informed that it will be thousands of dollars worth of repairs! There is just no way you can afford a trip to Europe and to fix your main form of transportation… unless you have an established emergency fund that can take care of all the damage. You never know when an emergency will happen, but you never want it to rain on the parade of an exciting purchase. Here are some myths that need to be BUSTED so no emergency leaves you financially stuck!
"My savings account is my emergency fund."
Well, it shouldn’t be!
Your savings account might be too accessible, which is why your emergency account should be kept separate and saved for emergencies only! Keeping it in your savings account, lets it get mixed up with other savings, like the backup funds for the extra splurges. It should be kept in a different place, strictly for emergencies. Another reason the savings account is not a good place for it is because regular savings account don’t usually have high interest rates. Consider opening a different kind of account, where it is still easily accessible, but because you’re not touching the funds very often, the interest rate is higher. Talk to your financial institution about the options they offer.
"I don’t need an emergency account, I have a credit card."
Not only is this wrong, it’s dangerous! In addition to the money you will borrow for the emergency, if you don’t pay the credit card by the due date, there will also be interest. If you can’t pay that off, it could negatively impact your credit score, as you can see it’s a slippery slope. Your emergency fund should be a separate account with funds already in it.
Tip: An emergency fund should cover approximately six months of living, which includes groceries, insurance, and other bills.
"I don’t need an emergency fund."
I truly hope you will not need it, but nobody can be sure. Just in case, it’s important to have a plan. Plan out how much of your paycheck you can allocate to an emergency fund. An emergency can be from a medical emergency, to a car emergency, to a household emergency, and not having a plan in place can be very stressful. Having a backup, you can focus on taking care of things.
Tip: Having a goal for your emergency fund could be helpful because it’s easier to work towards a goal rather than just throwing money in an account.
"My income isn’t high enough to make an emergency fund."
An emergency fund is very important! Try to fit it into your budget by swapping out a frequent want, like a double latte for a homemade coffee twice a week or skip the movies every other week, little things can make a huge difference. Also, consider ways to make extra money on the side. This doesn’t have to be another job, it could be babysitting once a week, dog walking, or selling something you already own but don’t use. If you allocate the money made from the side hustle to your emergency fund, it will build up in no time.