You Will Go Broke If You Spend Your Emergency Fund

#3 A flat tire isn’t an emergency, it’s an expense

I wish there wasn’t so much debate over the efficacy of emergency funds. While debate can be healthy, this particular issue risks leading savers and investors down a dangerous path. It’s easy to fall for the why would you want to keep money in an account that earns very little interest argument.

That said, you can wreck yourself financially if you misuse your emergency fund. Keep these points in mind to prevent yourself from doing so. I have done it enough times to know.

It exists for peace of mind

An emergency fund is akin to the extra chain lock you put on your door so you can open it slightly and look out to confirm who’s on the other side. It exists in case you make an error in judgment. You don’t want to open the door wide to a nefarious being. It will probably never serve its original purpose. But it’s there. It makes you feel good.

Treat an emergency fund like a fail-safe. If something goes awry elsewhere in your financial life, this money exists — three to six months’ worth of living expenses — to keep you from living on the street with no food.

I’ll trade a few bucks in interest any day for peace of mind. If you’re stressed out, you run the risk of making far more costly money-related mistakes.

It’s a snowball effect confidence booster

After ensuring you can meet your monthly expenses and eliminating debt, most personal finance advisors suggest stocking an emergency fund. Again, to cover reduced income. But the beauty of the fund might just be that it shows you’re capable of saving.

For many of us, it’s an accomplishment to finally see that much money in a savings account. If your monthly expenses equal $3,000, your emergency fund will ultimately have somewhere between $9,000 and $18,000. That’s a lot of money. Success breeds confidence. Confidence portends bigger victories. Once you hit a basic savings milestone, the effects tend to multiply.

Don’t skip this step. Consider it a rite of passage. Respect the process. Skipping ahead can have all sorts of practical and theoretical consequences. Use the time you spend building up an emergency fund to study and learn more advanced strategies, such as how to effectively invest in stocks for the long-term.

It’s difficult to put into words — even though that’s my job — but there’s something about accomplishing a relatively basic task before moving on to intermediate endeavors. From an investing standpoint, it’s like using options before stocks. Most people don’t do this. You tend to need the stock background to absorb and safely utilize options knowledge. Likewise, it’s ideal to become an expert saver before moving on to being an investor.

If you jump ahead, you risk lacking the foundation of a comprehensive financial plan. The emergency fund represents a life jacket you keep under your seat as you move into riskier territory.

A flat tire isn’t an emergency, it’s an expense

I try not to have many pet peeves. However, I can’t shake this one.

If your emergency fund exists to establish peace of mind, critically consider what you’re cultivating this peace of mind for. An emergency, in this case, is you lose your job or otherwise get hit with a loss of income. There’s no more money coming in — that’s a true emergency.

It goes without saying (I think) — you establish an emergency fund only after making sure you’re able to pay your monthly expenses. This requires a cost of living within your means. Ideally, keep a cushion in your expenses account to take care of unexpected expenses. Unexpected expenses are not emergencies. They’re the cost of doing life. Build them into your expenses.

If you treat a flat tire like an emergency, where will you draw the line?

Your television set breaks. Is that an emergency? Probably not.

However, if your laptop goes down, that’s an emergency. I know it is for me (knock on wood). But it’s still not good enough reason to go into your emergency fund. This is why I advocate for a considerable cushion in your expense (checking) account.

I’d rather be in the position of using new cash to replenish my expense account than my emergency fund. There’s greater urgency to keep the expense account topped off when it dips than the emergency fund. Psychologically, it’s easy to treat your emergency fund as a backup account. If it’s a backup, you don’t have to take as good care of it as your main account.

Once that emergency account gets to $9,000, $18,000, or whatever your number is, make it your goal to keep it there. To the dollar. Act as if it doesn’t exist. It needs to be immediately accessible from a practical standpoint, but, in your head, you can’t touch it.

I tend to be a stickler on these finer points. Not everyone will agree with me. I get that. I can only speak from my experience. I have made enough mistakes with things like emergency funds to know I have to treat them with practical and theoretical rigidity so things don’t go off the rails.

I have literally gone broke by mismanaging my emergency fund. I let it get low — because I tapped it liberally — and, before I knew it, it was practically empty and my checking account was too. Believe me, this is not a fun situation to find yourself in.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.