6 Emergency Fund Myths You Should Stop Believing

Starting an emergency fund can feel like a daunting prospect. On top of saving for retirement and key financial goals — not to mention just covering the daily necessities — putting money away for a rainy day can seem overwhelming.

But don't let negative thinking or unfounded myths prevent you from securing your financial future. Here are six common (and completely useless) myths you'll encounter on your way to building an emergency fund.

1. I'm Too Old

You are never, ever too old to start saving money. Whether you've never done it before or you've survived a financial disaster and are starting over, it doesn't matter how old you are to begin saving for contingencies.

The purpose of an emergency fund is to help you make sure that you have back-up money in case something bad happens. Maybe you lose a job, or someone gets sick, or your car needs a repair. All of these unexpected expenses can cause you to go into debt if you don't have funds set aside. And they can happen at any point in your life, which means you should always be prepared.

So start your fund, regardless of your age. Even if you feel like you'll never save as much as you want or need, every dollar you put away will be helpful if something bad happens.

2. I'm Too Young

Young people tend to feel invincible, and it's easy to think, "Oh, I'm not going to get sick. I've got a good job and my car runs well, so I'll start saving later."

The problem with this thinking is that bad things do happen to young people. It's rare, but they do get seriously ill. A good job can be lost. A great car can be totalled in an accident. And an emergency fund can make all of these situations easier to get through.

Also, just because it's less likely that something bad will happen soon doesn't mean that you don't need to start saving now. The more you save now, the more you will have when unexpected negative financial events do come your way!

3. I Have Too Much Debt

It's easy to feel like you should pay off all your debt before you even think about putting some money away. However, not having an emergency fund often leads to more debt, because you have to put unexpected costs on a credit card or get a loan. The compound effects of this, over a lifetime, can be financially crippling.

Usually, it's possible to both save money and make payments on debt. Even if you just put a few dollars away each time you get paid, this will add up over time. It can also give you a psychological edge, just knowing that you are managing to save something.

4. I Don't Make Enough Money

When you are living paycheck to paycheck, it can feel impossible to start an emergency fund, simply because you don't have anything to put into it. For most of us, though, there is something (no matter how small) that we can cut out of our budgets so that we can start a fund.

I know someone who took the "latte challenge" seriously. Instead of stopping for coffee every morning, she got a good coffee pot and then started putting that money into an emergency fund. And it really worked! In just a year, she had saved over $1000. When her car broke down, it was enough to make the needed repairs without leading her into more debt.

The truth is that the less you make, the more you probably need an emergency fund, because you have less discretionary money available to cover unexpected costs. So start small, but do get started!

5. I Can't Save Enough

Even if you aren't living paycheck to paycheck, it can feel like you'll never have enough in your emergency fund. There is some controversy about how much money an emergency fund should have, but most sources say that it should contain three to six months' worth of living expenses.

That's a lot of money. If you need $5,000 to cover your expenses each month, that's $15,000–$30,000. I don't know about you, but that's a daunting sum.

Here's the thing, though. It's better to have something saved than nothing, even if you can't save as much as you'd like. Just because you can't put that much away right now doesn't mean you shouldn't get started. And even if you never get to your ideal emergency fund number, your savings can still help you when you need it.

6. But I Have a 401K

Some people consider their 401K to be their emergency fund. Sure, there are penalties for taking money out early, but at least it's there, right?

There's some truth to this. If you absolutely need to, it's usually better to dip into retirement money rather than take on more debt. But a 401K actually makes an inefficient emergency fund. Even taking money out of a Roth IRA is a better route.

401K funds are complicated because of taxes and fees.Taking a loan can also mean that you have to work for your current employer until you pay that money back, since you typically have to repay any outstanding balance on your 401K loan within 60 days when you separate from your company. Usually, your company will take a certain amount out of your paycheck until the loan is repaid. Keep in mind, this is in after-tax dollars; thus, you're taking home less money every pay period, which can create an even greater financial crisis. And even if you qualify for a hardship loan, you will have to pay the money back somehow.

The penalties on taking money out of a 401K before you're 59 ½ can also be steep, so it's better to keep your emergency fund separate from your 401K. In fact, there's no good reason not to start your emergency fund today. Make your plans, then do what you need in order to set aside this money and keep it separate from the rest of your funds. When that rainy day comes, you'll be glad you did.

How much do you think an emergency fund should have? Do you have that much saved right now?

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