Financial gurus tell everyone to have an emergency fund - but there's a better way
- Jesse Mecham is the author of "You Need a Budget" and the founder of a personal-finance platform by the same name.
- He recommends dedicating funds to specific types of financial crises, instead of having one generic emergency fund.
- That way, you'll be less inclined to borrow money from your savings, since you know it has an important purpose.
When it comes to saving money, Jesse Mecham would rather be realistic about human behavior than logical.
Mecham is the founder of personal-finance platform You Need a Budget and the author of a forthcoming book by the same name. He says the concept of an "emergency fund" isn't as helpful as other financial gurus would have you believe.
Instead of stashing away a sum of money for anything that feels like an emergency, Mecham recommends saving money targeted to specific expenses. For example: funds to rely on if you lose your job.
Mecham writes that these targeted funds are "much less likely to get raided, since we're holding them with a purpose. We can easily rationalize plucking money from a generic emergency fund when we're not sure exactly what it's being held for. But when you know that money is for medical bills, you're much less likely to siphon from it to pay for a birthday present."
Even if it's the same amount of money, you'll be less inclined to dip into it. It's the math approach versus the realistic-about-human-behavior approach.
If you combine this strategy with another one of Mecham's strategies - budgeting for "unplanned" expenses - you won't even need that many targeted sums. For example, if you create a monthly spending category for car trouble, it won't be a financial crisis when you inevitably get a flat tire.
Once you've dedicated funds to specific types of emergencies, you can sock them away in the right place. David Bach, author of the bestselling book "The Automatic Millionaire," for example, recommends using a money market account.
In the event that you do borrow money from your targeted funds, you'll be more likely to return it. As Mecham writes, "You know how much you need to put back, and why. The stakes are clear."