I’ve always been an avid saver, partly because I have really big dreams of traveling and retiring early, and partly because I’m constantly petrified that the Absolute Worst will happen.
Now, I know you need an emergency fund—a stash of at least six months of net income—should you run into a job loss, hospital visit or any other “oops!” of the more dramatic variety.
Like many of us, however, I've dipped into my savings for some questionable reasons. In my defense, they certainly felt like emergencies at the time!
Get started with a free financial assessment.
Get started with a free financial assessment.
Just to alleviate my conscience, though, I spoke with Tonya Oliver-Boston, a Certified Financial Planner™, to see whether I was actually right to use my savings—and how to do it better in the future.
The First Time: To Pay Off Debt
I went to a notoriously image-conscious Southern college, where girls curl their hair for class and wear $700 designer dresses once—and never again. In my sophomore year, having always been a bit of a plain Jane with no fashion sense, I wanted to buy some beauty. With my unused credit card and healthy savings account (I still had money from my lucrative high-school job as a nanny, plus some more from my college job in a sandwich shop), I figured I could loosen the reins on my frugal ways.
After a spree of spending on cute dresses, $100 salon haircuts and nights out on the town, I racked up about $2,500 of credit card debt. My inner saver was appalled. I didn’t want to pay more interest than I had to on that balance, and as a young, healthy individual with no mortgage or family, I thought I didn’t need the savings as much as the peace of mind ... so I drained my emergency fund to pay off my bill.
What the CFP® Had to Say: Although it’s tempting to use accumulated savings to pay off debt (particularly credit card debt), Oliver-Boston says that it’s usually not the smartest idea.
"While paying off debt with a higher interest rate than what you’re earning on your savings will always mathematically prove to be the right answer, day-to-day living doesn’t always work out as nicely as a balanced equation—you might need that money for something even more urgent than interest payments," she explains.
A better idea, she says, is to pay down debt over time through budgeting and tracking expenses instead of depleting your savings to be instantly debt-free. That way, even when your cash is called up to bat, you'll still have funds left to use. After all, who says you can't have credit card debt and a financial emergency all in one rough month?
The Second Time: To Land a New Job
After college, I landed a paid internship in New York working in international relations, but I was miserable—as in, cry-myself-to-sleep miserable. My daily work was largely mind-numbing research about nuclear processing, which sounds a lot more exciting than it is, and to continue in my field I would have needed at least a master's degree. I realized I needed to make my escape before investing that much more time and money in something that bored me to tears.
So I applied for an unpaid public relations internship in my hometown of Atlanta. The only way to interview was in person—a plane ticket away. On my measly $400 per week stipend from my New York job, a $400 plane ticket was a huge expense, and it required dipping into emergency savings. But besides the plane ticket, living in Atlanta—with my parents, as a matter of fact—would be significantly cheaper (and happier) than living in New York.
I landed the internship, my contacts from which led me to my current (tear-free) job in investor relations, a position that requires similar writing and client support skills. Who knows where I’d be if I hadn’t bought that ticket?
What the CFP® Had to Say: It may have been a better move to start saving an "exit fund" once I realized how miserable I was at my internship. "As with all major life events (like getting married, buying a house or having a baby), it's recommended that you take the time to financially plan for it before you pull the trigger," Oliver-Boston told me.
If you're ever crying yourself to sleep like I was, start stockpiling the funds for your escape as soon as that first tear falls. That money could come in handy for anything from a plane ticket to an interview to a suit for your first day on a new job.
And while a new job is not a financial emergency, it could be an opportunity to increase your income and do what you love, so it's best to have a cushion to borrow from in that instance—one that won't deplete your last reserves.
The Third Time: To Buy a Car
Shortly after moving back to Atlanta, my first car—a bright blue, eight-year-old VW Jetta—was starting to show signs of distress. The sunroof would open randomly (not fun on rainy days), the brake pedal would vibrate violently when idling and my maintenance bills were topping $400 about twice a year. When I took my car into the shop for its 100,000 mile checkup, I learned that the front right axle had disintegrated in the middle of the tuneup, rendering the car unusable. It would cost me over $1,500 to fix it.
At the time, I lived in the suburbs of Atlanta, and there were no public transportation options for me. I simply had to have a car to get to work, so I went to buy a new car—without having saved for it. I found a deal on a used Toyota Corolla, and I used about half of my $4,000 emergency fund to make a down payment on the car. I financed the remaining $10,000 at 0% interest for the life of the loan. I hoped that paying more for a "new-used" car from a dealer would decrease my maintenance payments, and so far I’ve been right. In three years with the Corolla, I haven't had an unscheduled or overly expensive maintenance charge!
RELATED: The Top Saving Mistakes to Avoid
What the CFP® Had to Say: Finally, I made the right choice! "Replacing your primary mode of transportation, especially when it's the way you get to work, is absolutely an acceptable use of your emergency fund," says Oliver-Boston. Fixing or replacing a failing car means you can get to work, care for your family (if you're a parent), and stay safe. Plus, I was lucky—I still had $2,000 left!
*Name has been changed.
Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial advisor for advice specific to your financial situation. The author of this piece is not a client of LearnVest Planning Services.