Personal financiers will frequently advise that you have an emergency fund of 3-6 months of expenses in your bank account at all times. Saving up this chunk of change can take a long period of time, especially if you have a high expense to income ratio, which many people do (especially if you’re paying down debt).
I remember a few months ago when I hit my $10,000 emergency fund target. I was so ecstatic for a brief moment, then I realized that the money was there, and it would stay there until I had an emergency, so other than my monthly interest accrual, there’s not much to be excited about.
I had to find another plan for all of the money that I was previously dumping into my emergency fund to get it up to that certain threshold. I was contributing hundreds of dollars each month to it, and now I could add that back into my savings plan or budget.
Once you’ve reached that goal and have a nice, healthy emergency fund in your bank, what do you do next? Spend all of your extra cash frivolously? Keep contributing to your emergency fund as if you don’t have a limit? Neither of these things were considered in my case.
Here are some suggestions on what your savings focuses can be after you’ve met your goal:
You’ve spent the last several months saving for an emergency fund. You may want to continue saving but also went to have a little fun with your money. Why not save up for a vacation? You’ll reach your goal a lot more quickly than you did your emergency fund goal, and you’ll be able to both save and enjoy yourself.
Plus, there’s nothing like rewarding yourself for doing so well. If you’ve been disciplined enough to meet your goal before actually experiencing an emergency, you need to take some time to pat yourself on the back.
Instead of blowing the cash that you are used to putting away after months of saving, why not put it toward your retirement? Revel in the fact that with every payment you make to your retirement savings account, your days slaving away at work in a dead end job dwindle.
If you start contributing more now, you will have to contribute less later when you will want (or have) to spend your money on other things.
Pay Down Debt
Hopefully you don’t have any debt, but if you do, you should skip over the vacation and start paying it down with the money you are introducing back into your cash flow. If you don’t have any consumer debt but still have a mortgage, don’t forget that your mortgage is debt! It’s a large, forgettable debt that can cause you to incur an ugly amount of interest.
Why not pay it down when you’ve maxed out your emergency fund? You won’t miss the funds because you’ve been saving for so long, so you might as well take extra steps to financial freedom. Can you imagine life without having to save for an emergency OR put money toward a mortgage?
Maybe you aren’t very happy in your job and you want to go for some retraining. Education is expensive, so once you max out your emergency fund you’ll have some free cash to go back to school (if you want to). Take advantage of the opportunity of having free cash flow before it all has a purpose.
A great option for any free cash that you have kicking around is to invest it. You choose the investment vehicle and type with which you are comfortable, and invest away. You might as well make that money grow.
Have you maxed out your emergency fund?