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Your emergency fund is intended to be your first line of defense when times get tough. But sometimes, it can be difficult to decide when to dip into these funds.
You may be reluctant to spend money that took a long time to save, opting instead to use a credit card or take out a loan and keep your emergency fund intact. Or, after going months without an emergency, you may be eager to spend the money on a want rather than a need. But an emergency fund is most helpful when it's saved and used as intended.
Learn about the benefits of an emergency fund and what you should consider as a true emergency so you can make the most of your hard-earned safety net.
An emergency fund is money that you set aside for unexpected events. It can provide financial security and help you get through a rough period without the added burden of financial stress. Unexpected expenses are an inevitability, and you can use these savings rather than having to borrow money or overdraft an account.
MetLife’s 17th annual U.S. Employee Benefit Trends Study found that the number one stressor for employees is personal finances. Two of the top five sources of concern were paying for out-of-pocket medical expenses and covering expenses after losing a job.
That stress, in turn, can lead to worse sleep, health issues, and a lack of focus at work. But knowing you have an emergency fund to fall back on allows you to react to challenging situations with thoughtfulness. For example, if you’re laid off, rather than taking the first new job that comes your way, you’ll have time to hunt for a job you want and negotiate your salary with confidence, knowing that you’ll be okay in the meantime.
With all the benefits that can come from having an emergency fund, it can be difficult to give yourself permission to spend the money. Here are a few examples of when dipping into your savings may be appropriate:
Tapping your emergency funds for non-necessary purchases, such as an extravagant vacation or lavish dinner out, can be tempting. However, try to maintain a strict barrier between real emergencies and your wants. Otherwise, you could get stuck if an emergency strikes before you have a chance to replenish your savings.
A full emergency fund should have about three to six months’ worth of your necessary expenses†. However, if you’re starting from scratch, you may want to begin with a more manageable goal of $500 or $1,000.
It’s not going to happen all at once, as saving hundreds or thousands of dollars takes time and effort, and often, a mindset shift is an important part of the process.
One trick is to keep the money in a separate account, as it’s easier to avoid spending money if it’s out of sight. A high-yield savings account can be a good option that allows you to earn interest on your emergency fund.
Here are a few more tips you can use to build your savings:
Finally, remember that you’re not alone on this journey. If you want to learn more about managing finances, building savings, and using insurance to protect yourself from emergencies, MetLife’s financial wellness resources are filled with helpful tips and real stories of what has worked for other people.
Nothing in these materials is intended to be advice for a particular situation or individual. These materials are for general information purposes only.