Sometimes life unexpectedly happens. That’s why it’s of the utmost importance to have a financial emergency fund.
Tiffany Aliche, AKA The Budgetnista, knows the ins and outs of having one. Aliche is an award-winning financial education teacher and expert, and she spoke with In The Know about her list of emergency fund dos and don’ts.
“An emergency fund is money that you set aside, typically in a savings account,” Aliche explained. “In an online-only savings account, ideally, so you can earn the most interest. And that money is really set aside for when unexpected expenses come up that are truly an emergency.”
Do: Try to have at least six months’ worth of savings. This gives you six full months to recuperate should an emergency take place.
Do: Reduce expenses to your “noodle budget.” It’s the budget you’d have if you were relegated to eating Ramen noodles for each meal.
“Meaning your baseline budget,” Aliche says. “No extras, no luxuries. You’re cutting your own hair, you’re doing your own nails, you’re not really going out.”
Aliche advises to first drop down to your noodle budget before tapping into your emergency fund.
Do: Prioritize expenses like safety, health and income maintenance. First, prioritize mortgage or rent, then groceries and essential utilities and bills.
Don’t: Try not to spend your emergency fund money on non-emergencies. Aliche asks herself two questions to determine if a situation is urgent.
“One, if I don’t take care of this expense, will I be healthy? Two, if I don’t take care of this expense, will I be unsafe?”
Things like car trouble, heating and natural disasters all count as emergencies.
Don’t: Use emergency funds to pay off debt. Debt isn’t an emergency unless it leads to other urgent issues like eviction or hunger. Aliche advises paying the minimum or even going into forbearance before tapping into the emergency fund.
Don’t: Use retirement money as your emergency fund. A retirement account is for the future. Only pull from those accounts in an extreme situation that would leave you unhealthy or unsafe.
Don’t: Be afraid to use your emergency fund.
“Remember, your emergency fund is literally for emergencies,” Aliche says. “You’re really fortunate if you even have money in your emergency fund. Use it for what it’s worth.”
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