A solid emergency fund is a cornerstone of sound financial health. But once you've built it, it's easy to use it for minor crises, instead of full-on emergencies.
Photo by SteveWoods (Shutterstock)
Trent at The Simple Dollar warns against dipping into the emergency fund unnecessarily.
Let's say your car breaks down and you're facing a $US1000 repair bill. Ouch.
You're probably going to ask the repair place if they have some kind of instalment 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.
While an unexpected bill like this might rightly be considered an emergency, you should stop for a moment and try to come up with an alternate plan to pay for it, if at all possible. Your emergency fund should be untouchable unless you're hit with a bill that you literally can't afford to pay. Catastrophic medical bills or a sudden lay-off might warrant breaking the seal on the emergency fund, but something you can pay off with a few lifestyle tweaks does not.
When you only use your emergency fund exclusively for major disasters, you might also be able to get by with a smaller one, and use the savings to pay down debt or bolster your portfolio.
Relying Too Much on an Emergency Fund [The Simple Dollar]