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3 Emergency Fund Mistakes to Avoid

What should you do with your emergency once you've built it up?

By
Laura Adams, MBA
March 9, 2012

Lori wants to know:

I've accumulated a $30,000 emergency fund and am wondering how to manage it. First, where should I invest it? And second, should I use some of the money to pay for a car?

ANSWER: Congratulations on building up your emergency fund! To manage it the right way, here are 3 mistakes to avoid:

Mistake #1: Never invest your emergency savings.

As tempting as it may be to invest your emergency money, don't do it! Money you invest is always subject to some amount of volatility and risk, which makes it suitable for your long-term financial goals only. If you invest emergency money, its value could plummet at the exact moment you desperately need it. So remember that the purpose of an emergency fund is to keep you safe and give you financial security if your doorstep is darkened by an unexpected, devastating financial hardship, such as the loss of a job or an illness.

Mistake #2: Don't let your emergency savings sit idle.

Don't take the opposite approach with your emergency money and tuck it under the mattress. {C}While you may want to keep some amount of cash at home in a fireproof safe, it's best to keep most of it in an FDIC-insured, high-yield bank account. Here are 3 excellent savings accounts where you can earn competitive interest rates on your emergency money:

Mistake #3: Don't spend emergency savings on non-emergencies.

Be disciplined with your emergency money and never touch it except in a dire emergency! The amount of money you should keep in your emergency fund depends on your job and family situation. I recommend that you maintain at least 3 to 6 months' worth of living expenses at all times. So unless buying a car is a true emergency that Lori has no way to finance without tapping her emergency money, she should find another way to pay for it. Remember that whole point in having a financial safety net is to give you peace of mind and confidence that no matter what happens in your financial life, you're prepared for it.

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