Questions to ask yourself before using your emergency fund
We always talk about the importance of having an emergency fund. We believe it is necessary for peace of mind and to avoid money traps like payday loans.
An emergency fund is a savings account containing three to six months of expenses. It is to be used only in the event of an unexpected, necessary, and urgent emergency.
Typical uses for an emergency fund include:
Covering living expenses after an unexpected job loss
Medical emergencies
Emergency home repairs, such as the air conditioner breaking in the dead of summer
Car repairs after an accident
Necessary and unexpected travel, such as flying to see a sick relative
Sometimes, people may dip into their emergency fund for non-emergencies, and other times people avoid using the fund so much, they refuse to touch it even in an actual emergency.
An emergency fund shouldn’t be taken lightly, but it should also be used for its purpose. To avoid swinging too far on either side of the spectrum, ask yourself the following three questions any time you are thinking about withdrawing from your fund.
1. Is the emergency truly unexpected, necessary, and urgent?
This is always the first question to ask. Last minute Christmas shopping or a major sale on a computer you’ve been eyeing may feel like an emergency, but they are not. When faced with a situation where you are thinking about withdrawing from your fund, see if it meets all three criteria of an emergency. If it does not, it can probably wait.
2. Are there other resources to turn to?
Right now, many people may be dipping into their emergency fund after experiencing a job loss due to COVID-19. This is an excellent time to use your emergency fund, but before you withdraw everything, see if there are other resources you can turn to so you don’t drain your entire account. Talk to your utility companies to see if they are offering relief packages, visit your local food bank. These resources can help a lot during times like this.
3. Is there cash somewhere else?
Sometimes, you may not need to use your emergency fund to cover the full cost of the bill. Do you have cash somewhere else to help supplement the cost? Maybe you can pull from your entertainment fund to help cover the cost. Remember, whatever you take out of the emergency fund must be put back in, so the less you spend, the easier it will be to rebuild it.
Remember, the emergency fund is there to help you during life’s unexpected events. It is there so you don’t have to take out a payday loan or run up your credit card when something happens. Asking these three questions can help you determine whether or not to use your emergency fund.