Saving a full emergency fund of 3 to 6 months of living expenses (or more if you feel it necessary) is hard work.
During this phase of building your financial foundation, you’re putting a lot of time and energy into tracking your money and saving every dollar you can afford to build a cash cushion of $10,000, $20,000, or even more.
Now that you’ve done all the hard work of saving up that cash, it’s time for that money to start working for you.
No, I don’t mean you should take that money and dump it into the stock market. Your emergency fund is only for emergencies and should remain in a super boring savings account1 where it won’t get spent frivolously.
But just because you’re not spending that money doesn’t mean it can’t work for you.
As you begin to transition from saving to paying off debt or investing with your regular income, your emergency fund can be a powerful tool in that process without you ever spending a penny of it.
Today, I want to share 6 ways that just having an emergency fund in place can start saving you even more money right now.
1. Increase your Insurance Deductibles
Now that you’ve got several thousand dollars set aside in your emergency fund, you can afford to assume more financial risk when it comes to your insurance policies.
Increasing your car and homeowners insurance deductibles will reduce the amount you pay in your monthly premiums, and that’s extra money you can use now to pay off debt or invest to build wealth.
For example, on your auto insurance, you could increase your deductible from $250 to $1,000 per accident, since you can now afford to pay $1,000 in the event of an accident.
Increasing your deductible will lower your monthly premium.
Similarly, with your homeowners insurance, you could increase your deductible from $1,000 to $5,000. Having the cash to afford this extra financial risk will, again, greatly reduce your monthly premiums.
By having an emergency fund, you have the ability to assume a little more financial risk and save even more money on your premiums.
What We Did: We didn’t know about this tip when we first saved up our emergency fund, so we missed out on years of savings. But once we realized we were paying extra to have low deductibles, we increased our auto deductible from $250 to $1,000 and our homeowners deductible from $3,000 to $6,000. That move alone saved us about $70 a month that we chose to invest for retirement.
2. Skip the Extended Warranty.
Never pay for an extended warranty again because you can cover the repair cost yourself.
Extended warranties are just like your auto or homeowners insurance. You pay a fee in order to avoid some of the financial cost of fixing or replacing something like your phone, your washer or dryer, or your car.
But if you’ve got the cash to cover those repairs, then you can completely avoid spending extra money on additional warranty products.
You might like the idea of paying a little extra to avoid a potential $500 phone repair bill, or $2,000 car repair bill, but if you’ve got more than enough money to cover those expenses, why pay extra for some company to do something that you can do yourself?
You are your own extended warranty company and you should pay yourself the fee for your services.
What We Did: While we were never big extended warranty purchasers, paying for AppleCare on our iPhones has been our biggest expense in this area. In 10 years of iPhone ownership, neither my wife nor I have ever required any repairs for either of our phones. Obviously we didn’t know that when we bought our phones, but even if we had a $500 repair (or two!) along the way, we would have been better off just paying for it out of pocket instead of buying the insurance. We’re still learning!
3. Stop Getting a Tax Refund
Before having an emergency fund, you may have been joyful, or even dependent, on that boost of cash that showed up after filing your taxes every year.
But did you know that your tax refund is actually your own money that the government is giving back to you?
When you receive a refund on your taxes, it’s exactly that – a refund
That means that you paid extra money to the government through your regular paychecks during the year, and when you file your taxes the government realizes you’ve paid more than you owe and they refund you the extra money.
But why give that extra money to the government in the first place?
It would be so much better to keep that money and use it to pay off debt, invest to build wealth, or at the very least put it in a savings account and at least earn a bit of interest on it.
Giving it to the government takes all those options away from you, but now that you have an emergency fund stashed away, it’s time to stop giving free loans to the government.
To adjust how much federal tax is taken out of your paycheck, you’ll need to adjust your W4 form with your HR department at work.
The good news is that the 2020 tax law changes have eliminated the cryptic “allowances” question as a means of adjusting the amount of tax withheld.
The bad news is that although the new W4 form is a bit more straightforward, it’s still going to require some year over year trial and error to reduce the taxes you pay in your paycheck to only the amount you owe, or as close to it as possible.
The first step is to look at your W4 form at work and see if the questions are answered accurately.
If not, adjust them as necessary.
If they are correct, you may want to just leave your form alone this year and see how much you get back when you file your taxes.
For example, let’s say you get a $3,000 tax return. That means you paid an extra $250 a month (or $125 per paycheck if you get paid twice a month) in taxes throughout the year.
Now you can go back and adjust your W4 form to decrease the amount withheld from your paychecks by the amount of extra taxes you paid.
Keep in mind, this isn’t an exact science. There is no option on your W4 to say, “Reduce the taxes withheld from my paycheck by $125.”
You’ll need to adjust your W4, and then see how things go when you file your taxes the next year, then likely adjust a bit more.
The goal is to get your refund as close to $0 as possible, though hitting exactly $0 is likely never going to happen.
Having an emergency fund makes this easier because while adjusting your W4, you might overcorrect and end up owing some money in taxes.
With your full emergency fund in place, you’ve got the money to cover it, and you can adjust your W4 the next year to balance things out.
What We Did: We received regular tax refunds of $5,000 to $9,000 for years. We thought that was fantastic until we realized we were loaning the government so much of our money for free! With the old “allowances” system I had to adjust my allowances over 3 years from 4 to 9 and eventually to 14 allowances to reduce the extra taxes being withheld from my paycheck. It was a bit of a pain, but it put about $750 back in my paycheck every single month. That’s worth the trouble. Our tax refund was reduced to around $300 each year, and that was close enough to zero for us.
4. Pay Less to Invest More
Since we’re saving money on taxes, now is also a great time to think about increasing your investment in your work-sponsored 401k plan.
This money is invested pre-tax, which means the money you invest isn’t included as income when you pay your income tax.
This means you’ll owe even less in taxes at the end of the year.
I dubbed 401k plans the Extreme Early Retirement Account that Everyone Needs to Know About in my Fundamentals of Early Retirement course, and since you’re not loaning the government free money anymore, you may have a few extra dollars each month to invest in your 401k plan.
Reducing your tax bill and investing for retirement? That’s a smart money move. 😉
What We Did: Once our debts were all paid off (except for our house) we used the money we got back by adjusting our tax withholding to invest in my work 401k plan which further reduced our tax bill, which meant we were again giving free money back to the government in my paycheck. So I adjusted my W4 form again to get even more money back each month. It’s a fantastic money-saving cycle!
5. Save Up Cash For Your Next Car
As we’ve discussed many times before, buying a quality used car with cash is a great way to avoid ever paying a penny in interest to a bank again.
Now that you’ve got your emergency fund in place, you can use all the money-saving methods mentioned above, to start setting aside some cash for your next car.
Start by estimating how much longer you’ll be able to drive your current vehicle, and how much money you’ll need to set aside each month to pay cash when the time comes to replace it.
If this is your first time paying cash for a car, follow my Step-by-Step Guide to Buying a Used Car With Cash to get a great deal.
And don’t think that you need to pay $40,000 for a car. Some of the best used cars can be purchased for less than $10,000 when you let the first owner pay the premium new-car price.
Say goodbye to car-loan interest payments forever.
What We Did: We bought our first cash car back in 2008. It was a 1999 Jeep Grand Cherokee we got for $4,200 and I drove it until 2015. In 2009 we bought our 2002 Toyota Highlander for $7,000 and I’m still driving it today. With the birth of our 3rd child, we officially became minivan people, buying our 2009 Toyota Sienna for $7,200. This is still our main family vehicle right now.
6. Start Looking for Your Next Job
Ok, this isn’t a money saving move necessarily, but it is something you can do much easier now that you have an emergency fund to cover your bills as you transition jobs.
Sadly, the best chance many people have to significantly increase their salary is to change companies.
While internal raises and promotions do happen, they often don’t happen often enough, or at rates high enough to move the needle on your finances.
Also, when working to save up your emergency fund, you might be working in a job or at a company you don’t really like. While buckling down and doing what you’ve got to do for a few years to build your financial foundation can be a good thing, it’s not an ideal solution in the long term.
One of the biggest challenges when changing jobs is the uncertainty between getting your last paycheck from your current company and getting your first paycheck from your new company.
But now that you have an emergency fund, you’ve got the cash to keep yourself afloat between jobs, so now is a great time to start looking for your next job.
So build your skills, update your resume and your LinkedIn profile, and make sure you’re networking with folks in your industry.
When an opportunity comes along that looks right for you, you can take a shot without worrying how you’re going to pay your bills in between jobs.
What We Did: Way back in 2006, with our emergency fund in place, I quit my job in Houston, and my wife and I moved to San Antonio without new jobs. I don’t really recommend doing it that way, but it’s certainly an option, and it worked out great for us. I got a great new job at a wonderful company where I spent the last 12 years of my career before retiring in 2019 at the age of 40. If we didn’t have our emergency fund in place, we likely never would have taken the risk of quitting and moving. Having an emergency fund opens up all kinds of wonderful new opportunities.
Emergency Funds Change Everything
Those are just 6 ways that having an emergency fund in place allows you to start saving even more money right now.
With your emergency fund in place, this is the time when managing your money starts to get a lot more fun.
You’ve done the really hard work, and there’s more work to be done, but now that you have your financial foundation in place, you can start taking advantage of your hefty bank account to change your financial future.