How To Know When To Use Your Emergency Fund
Not all expenses are an emergency. Ask yourself these questions before you spend your emergency fund.
One of the more popular personal finance debates is the importance of an emergency fund.
Personal finance writers and enthusiasts alike seem to agree that an emergency fund is an essential component of a good financial plan. But if you continually use your emergency fund for non-emergencies, it might not provide much protection for your budget if some unexpected big bill arises or you lose your job. Considering the uncertain economy, paying close attention to how you use your emergency fund may be more important now than ever.
The purpose of an emergency fund is to enable a person to get through financial emergencies without incurring debt. An issue that isn’t often discussed is what type of events justify using your emergency fund. There are certain questions you should ask before you spend your emergency fund.
Is the “Emergency” a Want or a Need?
Many people cannot draw the line between something that is required and something that is desired.
If you work from home and your computer suddenly dies, the purchase of a new computer qualifies as an emergency. On the other hand, a new iPad is a want not worthy of your emergency fund if it’s simply for entertainment.
Was the “Emergency” Expected?
Could you have planned and prepared for the expense? If so, don’t dip into your emergency fund to cover it.
Maybe you pay your auto insurance premium every six months. You know in advance when it’s due and how long you have to save for it. You shouldn’t use emergency funds to cover it.
Is the “Emergency” Urgent?
I understand that a faulty car may require your emergency fund. You need to get to work. On the other hand, tinting your vehicle’s windows can wait until you save up the money in your regular savings account.
Can You Defer Payment for the “Emergency” or Pay in Installments?
If your heat pump breaks down in winter, it is an emergency, but many companies will let you pay over a number of months. If they’re not charging you interest, making payments is better than hitting your emergency fund.
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Does the “Emergency” Bear Financial or Other Severe Consequences?
An unrepaired leaky roof will lead to more expensive damage to your home. Not spending a dollar now will cost many dollars later.
Build an Emergency Fund
With these simple tips and tools, you can build an emergency fund, even while living paycheck to paycheck.
Finally, the argument of Professor Harold Pollack, a University of Chicago Professor and co-author of the book The Index Card: Why Personal Finance Doesn’t Have to Be Complicated summed it up when he said, “You should spend your emergency fund if spending it would leave you in a better overall financial position.”
Reviewed January 2024
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