There are many good reasons to increase your emergency fund. An emergency fund is one of the best ways to prepare for unexpected costs, such as a medical expense, a car repair or unexpected travel. However, there are wrong ways to achieve this financial goal. Here are seven bad ways to increase your emergency fund.
1. Ignoring Your Interest Rate
If you're looking to increase your emergency fund, it's important that you pay attention to the interest rate on your savings account. The rate you earn plays a role in how fast you’re able to grow your funds. Unfortunately, some savings accounts pay a pitiful 0.01% APR. But if you shop around and explore other options, you can locate higher rates.
2. Relying Solely on Certificate of Deposits
Opening a CD with your bank or credit union is an excellent way to grow your emergency fund, plus you’ll earn an impressive interest rate. But unfortunately, CDs are time deposits; therefore, your money isn't readily available until the end of the CD term. Depositing money into a CD is smart, but you need to keep some cash in a liquid account for emergencies.
3. Depositing All Your Extra Cash
If you're committed to building your emergency fund, you might deposit all your extra cash into savings. This will definitely reach your goal sooner. But if you deprive yourself and don't budget for recreation, you may burnout and give up on your goals. Put the majority of your extra cash into savings, but also set cash aside for a little fun. You deserve it.
4. Keeping Every Cent in an Online Savings Account
Online high-yield savings accounts pay more than a regular savings account; therefore, these are an option if you’re growing your emergency fund. However, it can take 2 to 3 days to transfer money from an online savings account to your brick-and-mortar bank. This is a headache if you need immediate cash for an emergency. While it’s good to keep the bulk of your cash in an online high-yield savings account, also keep cash in your regular savings for quicker access.
5. Jumping the Gun with Automated Savings
Automating your savings is recommended if you’re disciplined enough to transfer money into your savings account. With your savings on autopilot, you schedule automatic transfers each week, biweekly or monthly. Although a good plan, make sure this schedule works with your pay schedule. Automating your savings is easier if you earn a set salary or get paid the same time each month. But if you work in sales, or if you’re a freelancer with fluctuating income, automatic savings might not work.
6. Ignoring High Credit Card Debt
An emergency savings account is important, but if you have a ton of credit card debt, paying down debt should also be a priority. For many households, “the best return on their money is to pay down credit card debt,” says MSN.com. This not only reduces credit card balances, it also reduces interest charges, improves credit and restores peace of mind.
7. Not Replenishing Your Account
Realistically speaking, there will be times when you’ll need to take money from your savings account — maybe cash to tide you over until payday. Nothing’s wrong with this; however, to keep growing your savings, pay yourself back.
Unfortunately, increasing your emergency savings is much easier said than done. However, with a realistic plan and commitment, you can build your account and achieve a 3 to 6-month cash reserve. Is your bank account prepared for a financial emergency?