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5 Ways to Avoid Raiding Your Emergency Fund

Friday, January 20, 2017   (0 Comments)
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USnews.com 01/20/17

 

It's hard to put aside money for an emergency fund when your life feels like a never-ending series of emergencies.

Most experts say it's important to keep three to six months' worth of expenses in an emergency fund, a sentiment that presumably many people living paycheck to paycheck find daunting or laughable. Because when you're eking out an existence on a paltry paycheck, it can be hard to put aside enough extra money for three to six days' worth of expenses, let alone weeks or months. Even if you set a little extra money aside, chances are, you're constantly grabbing it to pay for unexpected expenses.

If you’re looking for ways to stop this cycle, try these strategies.

Define the word "emergency." If you're always raiding your account and later thinking that maybe you shouldn't have, it might help to ask yourself exactly what you feel constitutes an emergency, and then draw a line in the sand and hold firm to your definition. If your water is going to be turned off, most people would probably consider that a full-fledged red alert. But if you have a wedding or funeral to attend, and you'd like to buy a suit, do you have an old one in the closet you could get by with?

Everyone's going to have their own tolerance for when they need to break into their emergency fund, but the main thing, says Aaron Williams, a credit and housing counselor with Clarifi, a credit counseling nonprofit headquartered in Philadelphia, is that you ask yourself: "Are you planning to use these funds for a need or a want? Also, can these funds be replaced, and if so, how soon?"

There's also another logical question you ought to be asking, Williams says: "Do you have other financial sources that you can access other than the emergency account?"

However you define the word emergency, "the key word is 'unexpected,'" says Kimberly Clouse, a Boston-based chief client advocate for Covestor, an online investing marketplace. "If you're tapping your emergency fund for day-to-day living expenses, then it's really just another checking account."

Budget for emergencies. One reason you're always taking money out of your emergency fund is probably due to a budgeting problem. You may not be thinking much about what irregular expenses are coming up. In fact, future expenses might be the last thing you want to think about if you're having a hard enough time getting by now.

But most people budget for some emergencies, and you probably do, even if your emergency fund has cobwebs in it. If you have homeowners insurance, auto insurance or life insurance, for instance, you're protecting yourself in case of an emergency.

You just need to think of other ways your life might become financially unpleasant. For instance, Thomas Walsh, an investment analyst at the Atlanta office of the Palisades Hudson Financial Group, cites the classic example of knowing that one of these days, you're going to need a new vehicle.

"If you have a good idea that your car will last about three more years and will cost approximately $9,000 to replace, rather than ignore this future expense until it converts to a true emergency, begin planning now by setting aside $3,000 per year," Walsh says.

Another way to think about it, according to Walsh: "An expense should not be considered an emergency just because it does not occur regularly."

And, of course, even if you can't muster up $3,000 a year, if you put aside a grand every year toward a car, you'll be better off in three years than you would have been, and you'll have less of an emergency when your engine does finally die.

Make it difficult to access your emergency account. Is your emergency fund in an empty coffee can full of spare change? Or a savings account easily linked to your checking account? Then it's easy to see why the money never remains there. It's too tempting to pull money out whenever you need it. Maybe you need to put a few obstacles in the way.

"Make the savings account separate from your regular savings and checking account," suggests Donna Loitz, a counselor with American Financial Solutions, a credit counseling and debt management nonprofit in Seattle. "And don't opt for an ATM or debit card to be attached to the account."

And Kathryn Crumpton, a manager at the nonprofit Consumer Credit Counseling Service of Greater Milwaukee, has a shrewd idea for couples who truly want their emergency fund to be safe from minor raids: "If you share money decisions with a partner, have two signatures required for withdrawal."

Set up two emergency accounts. If you're always raiding your emergency accounts, set up two, suggests Lauren Sims, another counselor at American Financial Solutions. There is ingenious logic here if you're constantly raiding your emergency fund because you're constantly being nickel and dimed by unexpected expenses.

"In having two accounts, this will help you set goals and have something set aside for little expenditures that come up, and for true emergencies," Sims says.

You almost need two emergency accounts, says Sandy Shore, a counseling liaison at Navicore Solutions, a credit counseling nonprofit headquartered in Manalapan, New Jersey. Or, if you prefer, designate one an emergency fund and the other a fund for unpredictable or easily forgettable expenses, like car repairs or quarterly insurance payments.

"If you don't do that, the only place to go is the emergency savings," Shore says.

Keep replenishing the account. If you aren't budgeting to put money in your emergency account, and it's more of a hit-or-miss proposition, that may be another big reason there's never much there when you need it.

"Automate the deposits so you can follow the pay-yourself-first rule," says Bruce McClary, spokesman for the nonprofit National Foundation for Credit Counseling, headquartered in the District of Columbia.

He is speaking, of course, of the familiar suggestion that most personal finance experts adhere to. Before you pay your creditors, send a little money to your retirement fund, your savings and your emergency fund first. That can be hard to do if cash is really tight, and creditors are circling, but one thing is for sure: If you don't pay money toward emergencies now, you'll pay for them later


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