Having an emergency fund during uncertain times can provide you with some peace of mind and sense of security. Whether it’s fully funded or you are just starting to build it, you may be wondering what events would qualify as emergencies and allow you to dip into those funds. Do you need to rethink priorities? Should you move things around in the budget to make space for this new expense? Or is this a legit emergency? Of course, there is no shame in using your emergency funds, but you should ask yourself these 3 questions first.
Is it unexpected?
Tempted to use your emergency fund for holiday or birthday gifts? What about paying your annual property taxes? These are items that can be planned for and are not unexpected – they should be included into your annual budget. While it might seem like a small emergency at the time, it’s really just poor planning. Make sure to adjust your budget accordingly to add these expenses in.
Here are some examples of unexpected events: job loss, pay or hours cut, damage to your property caused by a storm, car accident, emergency medical bills.
Your emergency fund, once fully funded, should cover three to six months of expenses so in the event of a job loss or something truly unexpected, your finances won’t be destroyed.
Is it necessary?
We all struggle with deciding between wants vs. needs. While the line is often clear, it can get a little blurry. Feeling like you need a little ME time? You should absolutely do something for your self-care, but booking an elaborate vacation using your emergency funds probably isn’t the answer. You can do something much more cost effective (or even free) like getting a massage or pedicure or reading a good book or going for a hike.
So what constitutes a need vs. a want when it comes to using your emergency fund? Fixing your car, paying an unexpectedly high tax or utility bill, or traveling for a family emergency or death.
Buying the latest cell phone, upgrading to a new car you don’t need, or taking a trip for pleasure are all wants. It’s OK to buy them if you budget for them but using an emergency fund for them isn’t the best choice.
Is it urgent?
This can be the hardest of the three questions to answer, especially if you tackle everything in life with a sense of urgency. But step back, use a little patience, and think long and hard where this event falls on the priority list.
Some items that may be urgent are fixing a broken furnace in the dead of Winter or replacing a crashed computer that you need to do your job or school. Items that can typically wait are fixing your AC in the dead of Winter or buying a dress that you don’t need right now because it’s on sale.
Your emergency fund provides long-term security vs. instant gratification. The desire to use it for items that don’t meet the criteria above can be overwhelming. If you are facing a real emergency, you shouldn’t be afraid to use the funds to avoid going into debt or ruining your credit. Need help setting up a separate account to house your emergency fund – give us a call. We’ve got options!
Branch Manager – Torrington