The world is an uncertain place, meaning that at any moment you could find yourself without a job or in need of money. Establishing an emergency fund is one way to ensure your needs are catered for in unfavorable situations.
It is advised that an emergency fund contains enough money to cover your expenses for three to six months. An emergency fund is primarily there in case you lose your job and need to take care of bills while you find another job.
If you already have an emergency fund, you need to consider these five things before you start to spend from it.
Is it an unexpected expense?
Before you use your emergency fund to buy Christmas presents or to take that luxury vacation, you need to consider whether the expense was really unexpected.
You are likely to face unexpected expenses if you lose your job, if your pay has been cut, if there’s an act of nature that causes damage to your home, car accident expenses, or an unexpected medical procedure. Things like routine doctor appointments or car and home maintenance are not unexpected and you should not use your emergency fund to pay for these things.
How necessary is it?
Even if you do happen across an unexpected expense, it may not be immediately necessary. When you evaluate the expense you intend to cover with your emergency fund, decide whether it is a need or a want.
To establish this, you should run through all the consequences that could occur if you do not take care of the problem. Traveling in the time of a family crisis is a necessary expense, and could be sound enough reason to use emergency funds. However, taking an unexpected vacation is no reason to use your emergency fund.
Are there other payment options?
Before you just withdraw your entire emergency fund to pay for something, find out if there are other ways to pay. If there are other possibilities that won’t break the bank, it might be better to choose one of those options.
If you do not have a good credit score, consider an option like Kikoff that helps you build credit for free. Building your credit allows for a wider variety of payment options in times of emergency. However, if the emergency demands immediate full payment, it might be a valid reason to use your emergency fund.
What is the level of urgency?
The meaning of urgent can depend from person to person. Only you have the ability to assess the urgency of the situation before dipping into your emergency fund. Asking for advice from others can help but the final decision lies with you.
If you live in a hot climate, it might call for some urgency to repair your air conditioner if it breaks in the middle of summer. Without the AC, you might become uncomfortable or ill. However, the summer sale at your favorite store is not a matter of urgency and is not a valid reason for breaking into your savings.
Do the benefits make up for the expense?
While it can be beneficial to pay for an expense without going into debt, you need to remember that doing this will reduce the funds available to you in the next emergency. You need to consider whether the benefit of avoiding debt outweighs the cost of losing a portion (or all) of your emergency fund.
While you cannot know what the next emergency will be, you need to determine the severity of your current situation. In the end, using your emergency fund requires careful consideration to make sure you are covered in case you need it again.