“Build an emergency fund.” This is probably the most famous piece of financial advice that you have heard. Well, this fund is meant to cover emergencies such as an unexpected car repair cost or an unexpected medical bill.
Unfortunately, some people build their emergency fund and end up spending it when they shouldn’t. Before you dip into your emergency fund, you need to assess your current situation and determine whether it can be classified as a financial emergency.
But, how can you determine whether the situation warrants a visit to your emergency fund? Well, we have compiled a list of critical questions you need to ask yourself before you turn to your emergency fund.
Is the Situation Unexpected?
Life has many expected and unexpected costs. Your household budget outlines your expected weekly or monthly expenses. They include insurance costs, food costs, clothing costs, electricity costs, and so on.
There are also other expected costs such as holiday gifts and back to school expenses that you need to take care of. You may also schedule to service your car twice a year and your HVAC system once a year.
All these are expected costs, and you should find a way of including them in your budget. Don’t tap into your emergency fund to settle any expected cost.
However, other expenses are genuinely unexpected. For instance, if your washing machine breaks down unexpectedly or your loved one is admitted in hospital and the hospital bill skyrockets to unforeseen levels, then these can be considered as unexpected costs.
Now, if you incur such an expense, then you can swiftly consider tapping into your emergency fund to normalize things.
Is It Urgent?
When an urgent financial need comes up, the last thing you should worry about is how you are going to raise funds to pay for it. For instance, if your little kid falls and hurts his/her face or your just installed furnace suddenly breaks down in the middle of winter, don’t stress.
Focus on the task at hand and let your emergency fund save you. If you have not saved enough money in your fund to cater to the need, consider taking a short-term loan to supplement it.
However, you should keep in mind that big purchases are not urgent. Therefore, just because your favourite electronics shop is having a clear-out sale of the decade it doesn’t mean you use your emergency fund to get a new fridge, washer, or oven.
If you want to replace old but still-functioning appliances in your home, save money and make a move only when you have saved what is enough.
Does the Benefit of Using the Money Outweigh the Cost?
Lastly, you will need to establish if using your emergency fund will be worth it in the end. The benefit of dipping into your emergency will be covering an extra expense without slipping into unnecessary debt.
The cost would be losing some or even all of your emergency fund savings and having to start again from scratch. Therefore, before you dip into your emergency, weigh the costs vs. benefits of such a move and make an informed decision.
Keep in mind that once you use your emergency fund, it will take some time before you can build another financial cushion to back you up next time.