5 Emergency Savings Mistakes to Avoid

Quick Answer

Setting aside funds to make it through an emergency expense or a dip in income is a smart way to protect your finances. But emergency savings mistakes like not funding your account to cover three to six months’ worth of expenses, investing your funds or dipping into your funds unnecessarily can throw a wrench in your efforts.

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Having enough emergency savings to make it through a sizable emergency, such as an unexpected loss of income or expensive medical bill, can help you come away from hard times with less damage to your finances. Not only can that help you increase financial stability, but you may also sleep easier at night knowing that a broken appliance or an urgent car repair won't send your budget crashing or cause you to rack up expensive credit card debt.

But even if you're already saving for emergencies or sitting on a flush financial pad, you could be making one of these mistakes—and it could cost you substantial cash over time or make it harder to access your funds in an emergency. Stay on track and increase resilience by avoiding these five emergency savings mistakes.

1. Not Saving Enough

Without funds set aside for an emergency, finding yourself in a pinch can quickly turn into a financial disaster. That can mean feeling forced to borrow money at a high interest rate, which is a common entry point into a debt spiral.

Experts recommend setting aside between three and six months' worth of basic expenses in an emergency fund. But some people, such as those with an irregular income, who are trying to start a business or whose income supports multiple members of their household may feel more comfortable saving even more.

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2. Ignoring High-Interest Debt

While saving for emergencies is important, you also need to keep tabs on your debt. If you're saving wherever you can and depositing the funds into savings while also carrying a balance on a credit card, you could end up in the red over time.

For example, if you're carrying a $3,000 balance on a credit card with an interest rate of 17% and a minimum monthly payment of $73, making only the minimum monthly payment would mean paying $1,530 in interest alone—in addition to repaying the balance itself. That's a substantial amount of money. That's why making only the minimum payment on a large balance isn't usually the best decision.

That said, many experts still recommend prioritizing building a basic emergency fund, even when in debt. If you don't, you could just end up in more debt if an emergency strikes. Work to come up with a plan for saving toward your emergency fund goal while paying down debt using a strategy such as the snowball or avalanche method. Striving for both goals at once isn't easy, but it can mean coming out ahead.

3. Taking Saving Too Far

On the flip side of contributing too little, being too disciplined with your savings can be a recipe for burnout. Come up with a savings ratio that you can live with. If you try to leave yourself with no money whatsoever for enjoyment in order to salt away as much as possible, you'll likely struggle to stick with your plan.

The right savings ratio for you depends on your personal financial situation. Start by making a budget. Look for realistic ways you can cut back without feeling overly deprived. That may mean skipping takeout in favor of cooking at home or thrifting your clothes rather than buying new. Once you find ways to free up funds, direct that money into savings.

4. Investing Your Savings

If you invest your rainy day fund in the stock market or in another type of growth asset, you're at risk of being unable to access the money in an emergency. Cashing out your emergency savings when they're tied up in these risky assets can mean having to exit your positions at a loss.

Instead, keep your emergency savings where it's liquid. Your best bet is a high-yield savings account, money market account or other savings account that earns more interest than a basic bank savings account. While the interest you'll earn on money saved in these accounts isn't as high as the returns you might see investing, you also won't be at risk of losing your safety net.

5. Dipping Into Your Emergency Fund

As you build up a flush emergency cash reserve, the temptation to reach into it to fund a purchase that isn't a true emergency can be real. But avoid that impulse. Once the line blurs between when it's OK to borrow from your emergency fund and when it isn't, it can be tough to stay committed to keeping those funds separate. It's best to draw a hard line and only use those funds when you truly need to.

To keep your emergency safety net intact, be sure to also replenish any funds that you use in an emergency. If you need to borrow $1,000 from your fund to replace a broken refrigerator, make a plan for how you'll replace that money. For example, you could set aside an extra $100 per week to build back up your fund in 10 weeks.

Take No Gambles With Emergency Saving

Emergencies happen to everyone, so saving for the unexpected is a prudent move. But any of the above savings mistakes can lead you into a sticky situation. Aim to set realistic savings goals, set up automatic transfers into your savings each payday and leave the funds alone. That way, they'll be there for you in a true emergency.

In addition to building up stability with an emergency fund, be sure you're prioritizing paying off any high-interest credit card debt or loans. Those debts can weigh your full financial situation down. Check your credit report for free through Experian to see all of your outstanding debts, then make a plan for paying them off alongside your savings goals.