How to Stop Yourself From Spending Your Emergency Fund

by Miranda Marquit · 12 comments

What truly constitutes an emergency? Many of us tend to justify taking money out of our rainy day fund by calling something an emergency when, really, it’s not a true emergency. As you work on building your emergency fund, take a step back and consider how you will use the money you accumulate.

Dr. Stephen Lesavich, the co-author of The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards, suggests to create spending rules so your emergency fund doesn’t become a sort-of general fund that you raid whenever you feel like it. Here’s how to put spending rules on your emergency fund, that you’ll actually stick to.

Define What a True Emergency Is

Your first step is to figure out what counts as a true emergency. The fact that your TV broke and you’d like to get a new big flatscreen doesn’t qualify as one.

“You should identify what a typical emergency for your household at your income level is,” says Lesavich. This means you should consider what it might cost to fix a car, buy a new washer, or pay dental bill. “For many people, just putting $100 a month is enough to get a good start on these types of emergencies.”

It’s better if you can set aside a little more, of course, but Lesavich says,

it’s better to start small than to avoid starting at all.

A true emergency is anything that comes up that impacts your life in a very real way. If you need to be able to get to work, a car repair is an emergency. If your fridge breaks down, you need to buy a new one, since your food will spoil without it. Get back to the basics of needs vs. wants, and understand that a true emergency is something that is related in some way to true needs and survival.

Make the Funds Harder to Access

Lesavich says that it’s been more than five years since he’s had a true financial emergency. As a result, he has quite a bit of money stored up. If you don’t like the idea of a huge amount of money sitting in a low-rate savings account, you can invest a portion of it.

“If you have an emergency fund, and no emergencies occur, you can remove some of the money and transfer it elsewhere, such as to a CD, or to some other investment like stocks or bonds,” says Lesavich. “That way, the money is working for you, helping build your net worth, but you can still access the money if you have a major emergency.”

Lesavich suggests that 25% of the fund is a good amount to move over, but if you have a large enough account, and are confident you can handle most small emergencies after moving 50% or 75% of the money elsewhere, that might not be a bad idea.

The idea is to keep your short-term savings really accessible, so you can access them when you need quick money to cover a tow bill, or buy a new dryer. However, you still want to have money available to you (though it may take time to access) in case you have a larger emergency.

What rules do you have in place for your emergency fund? How do you keep yourself from spending it on wants, instead of saving it for needs?

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  • Ryan says:

    I’d like to know more about where to put that emergency fund. I put $300/month into mine, a savings account with US Bank. I know many people suggest 8 months of expenses as an emergency fund. I dont like the idea of having $12k in a savings account earning next to nothing in interest. I know that you can deduct contributions from a Roth IRA without penalty. Maybe this would be a good place for most of the e-fund, the portions I don’t need immediate access to. What are your thoughts on this? I’m a single guy with a decent, secure job and 25 k in student debt, 14k in a car lo

    • Kenny Schneider says:

      Here’s a question for you. If you had $1,000 in the bank and $14k in loans, would you go borrow $11k to have more cash on hand that earns nothing while your loans cost you money? That’s essentially what you’re doing by working on a fully funded emergency fund before paying off your car and student loans.

      Dave Ramsey would recommend that you put $1,000 in a money market or something that’s very liquid and use the other $11k to pay down your car note. In a few months, you’d have it paid off and then you can focus on tackling your student loans.

      As for not earning money in your savings account, you have to realize that an emergency fund is insurance against bad things in your life. Insurance always costs you money, it doesn’t earn. But, you’d rather have that safety there when you need it than in some investment that took a recent dive at a time when you desperately needed the money.

  • Amy says:

    We have six months worth of expenses in a CD ladder. We have never touched that–that would be for catastrophic health issues or a job loss. In addition, we have a “buffer account” for mini-emergencies–car repairs, medical bills, appliance replacement. Luckily, we have enough wiggle room in our regular monthly budget to pay for some of those things without dipping into the buffer, but if it was above and beyond what we already have to work with, then (and only then) would we borrow from that buffer account.

    • David @ says:

      Good idea to put your emergency fund in a CD Amy. As you know, emergencies doesn’t happen THAT frequently once you’ve built a financial cushion, so it’s good to have the funds earning some interests.

  • Kenny says:

    My wife and I prepare a budget every month, and stick to it. Our baby emergency fund is, for better or worse, just a certain balance in our checking account. We try to end every month with what we started with. So, any extra money goes to our debts on the first of the month.

    The account isn’t gaining interest, but it’s very accessible in case we need it. I don’t recommend that for everyone, especially those who are just starting out budgeting because they may end up spending their emergency fund without realizing it.

    Once our debts are paid, and we really start saving, we’ll likely just open up a money market account from our bank for quick and easy access to the funds.

    • David @ says:

      Have you thought about shoving the extras towards your debt the day they hit your account instead of waiting until the first of the month? It’ll take quite a bit more accounting work and possibly mental calculations on your end, but you do end up paying less interests.

      Depending on the amounts involved though, it might not be worth the trouble but it’s an idea you may want to mull over!

      • Kenny @ Rocking Real Estate says:

        Great suggestion David! Actually, I have thought about doing that but, as you mentioned, for the added hassle it’s not worth messing with.

        • David @ says:

          Yeah the calculations can get hairy, not to mention that one misstep might cancel out years of savings.

          Just keep thinking about ways to gain an edge and you’ll be way ahead when you cross the finish line!

  • Emily says:

    We have money set aside each month for home and car repairs, we also have insurance and live in Canada where medical emergencies aren’t such financial emergencies. Our emergency funds are just mixed in with our cash and investments. The real emergency for us would be loss of our single income, so we have quite a bit accessible in case we go into job hunt mode.

    • David @ says:

      Good for you Emily. I miss being in Canada where I don’t have to worry about healthcare costs at all. Like Forrest Gump says – “And I said, that’s good! One less thing.”

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