What is one of the top mistakes that people make with their money? A TD Ameritrade survey focused on Millennials asking this question and found their biggest money blunder was not having an emergency fund set up. I thought about it for a while. If this was a universal question, what would the answer be across all age groups?
I actually think that not building an emergency fund would be a universal answer. Focusing on building an emergency fund creates some good habits by default. It is the creation of the habits at a young age that build a foundation for success with money. If you didn't get this habit when you were younger, it is not to late. There are three main habits that have the opportunity to be formed as a result.
You have to develop the habit of living within your means
Not living within your means would be a close second to not having an emergency fund set up. Here is the bottom line - it is almost impossible to create an emergency fund and save to build one without learning how to live within your means. If you are serious about building an emergency fund, then you are going to develop the habit of living within your means by default.
You have to develop the habit early on of saving money
I have always said fund your emergency account before you start funding your retirement. You have to take care of the short-term before focusing on the long-term. To build a big emergency fund you have to aggressively save. Remember the longer you go without one the more exposure you have. Plus if you ever deplete it, you have to start over again with the aggressive saving.
You are more than likely to stay out of credit card debt
Credit card debt is the combination of irresponsible spending and the funding for the "life happens" events. By developing the first two habits above you should greatly reduce the risk of irresponsible spending. An emergency fund takes care of "Life Happens" moments.
It is always crucial to focus on the accomplishment of the development of the most important habits. These most important high priority habits force you to create other habits that are needed just as much for future success.