Sometimes, when you have a hammer, everything begins to look like a nail.
Take an emergency fund. What do you do in a financial emergency if you don’t have one?
Let’s say your car breaks down and you’re facing a $1,000 repair bill. Ouch.
You’re probably going to ask the repair place if they have some kind of installment plan to pay for the repair. You’ll also probably tighten up your spending for a while, cutting back your Starbucks stops and your meals at restaurants and your entertainment spending.
Those are healthy responses to a crisis. The thing is, with an emergency fund, most people won’t bother. They’ll just tap their emergency fund, pay off the car bill, and keep moving along as though nothing has changed.
The same is true when an unexpected bill arrives in the mail. You forgot about your property taxes? Well, let’s just tap that emergency fund to get rid of it.
Sometimes, even small things seem like emergencies. My child needs $200 for instrument rental for band? Thank goodness we have an emergency fund!
The problem is that most of the above concerns should have never involved a person’s emergency fund.
An emergency fund is a reserve of money to handle bills where you actually cannot afford to pay them. None of those situations – except arguably the car – are actual emergencies.
Here’s the truth: actual emergencies can really devastate your life. Having to scrimp a little to cover an unexpected bill is not a devastation. Squeezing in a car repair payment isn’t a devastation, either.
What’s devastating? It’s when you’re facing a bill that you can’t actually afford to pay. That can happen due to a job loss or an illness or, yes, even a car repair.
However, throwing your hands up at an unexpected bill isn’t a good solution. If your spending has put you in such a precarious spot that you can’t handle an unexpected bill – or even an expected but irregular one – your emergency fund is not the answer.
If you find yourself tapping your emergency fund for relatively minor things because you’re constantly strapped, you need to evaluate your spending, not your emergency fund.
A healthy monthly budget has some flexibility to it. You should see some left over money each month and, once your emergency fund is covered to an extent that you’re happy with, that extra money should be going to repay debts and, if you’re debt free, to investments.
In a month where a minor emergency strikes, use that flexibility to your advantage. Pay off that unexpected bill. Handle that minor crisis. Do it without your emergency fund. Scrimp a little extra, then still make that extra debt payment.
That way, when a real emergency strikes, you have your full emergency fund intact, ready to help you through a genuine crisis.