There are many reasons why you need an emergency fund. It is not enough that you make the right spending choices. It is not enough that you spend within your means. You need to prepare for any unexpected situation because it can cause you to fall into debt so easily.
A lot of people have gone through life without debt. They have made the right choices when it came to spending and have used credit wisely. They have invested in their home and made smart choices about how much they can afford to borrow. However, these acts will not exempt these people from falling into a financial problem. One sickness that requires thousands of dollars in payment or one tragic accident or job loss can quickly pull you under. All because you do not have an emergency fund.
According to a survey done by Bankrate last June 2014, 50% of their survey respondents have less than 3 months worth of expenses in their reserve fund. More than half of that (or 26% of the respondents) do not have a single cent tucked away for emergencies. The survey revealed that some consumers failed to save for emergencies because they did not plan for it. They pay off the usual expenses like utilities, rent/mortgage, etc and will only save what is left after everything is paid off. But guess what? In most cases, there nothing left to save.
Some people say that they find it hard to save because they have other priority expenses. They put their emergency fund last on the list. For instance, some people choose to save up for a new car or the down payment of a new home instead of saving on their emergency fund. Some people choose to pay off debt first.
While these expenses are important, you have to know that preparing for emergencies is also very important. It should be comforting to know that although they are not the majority, 40% of the Bankrate survey participants, have three months worth of expenses or more in their emergency accounts. 23% said that they have 6 months or more in in case of emergencies.
3 ways to use your emergency savings
Although there is a lot of room for improvement when it comes to building our emergency finances, it is also important to consider how you will use the money you have saved. You may have the emergency fund all saved up but you need to commit to how that money should be used in the first place. Some people blow up their reserve fund because they did not clearly define what an emergency is. When the more devastating disaster strikes, they are left with nothing.
One of the emergency fund best practices that you should learn is how you can learn to use this fund correctly. To help you decide, here are 3 important uses for an emergency fund that you should not hesitate to push through.
After an unexpected job loss.
Obviously, this is an emergency. When you do not have any income to get your funds from, then you need to dip your hand into your emergency savings. The only other alternative is to rely on your credit cards – which will put you in debt. That is not really a good idea because you will just make your financial situation worse. Just use your emergency fund frugally while you are in the midst of looking for an alternative source of income.
After a natural disaster.
Another good reason to use your emergency resources is to help you survive a natural disaster. This is another one of the unexpected disasters that you are saving up for. According to an article published on FinalDaysSurvival.com, preparing for a natural disaster is not only about protecting what you have as the disaster is happening. It is also about recovering from the aftermath. And when it comes to recovery, we all know that it usually requires money. If your house was flooded or totally wrecked, there are government financial aids but you can act on rebuilding your life if you have your own emergency savings.
During a health emergency.
Lastly, you need to use your emergency fund for your health. This is one of the unexpected expenses that you should not hesitate to pay off – especially if it is a matter of life and death. With the high cost of getting health care, it is common for some people to deplete their reserve fund just to pay this off. This is okay as long as you make a plan to rebuild your emergency fund. Dave Ramsey, in one of his shows, encountered a caller who had this dilemma. His medical bill threatens to deplete their emergency savings and he was hesitating to do it. Watch the video to hear what Dave Ramsey had to say about it.
3 ways you need to think twice before using your reserve fund
Of course, the use of emergency funds go beyond the three that we have listed above. But the other uses of this reserve fund will have to be done carefully and smartly. While they are smart uses of your money, it does not always mean that you should use your emergency money on them. You need to analyze the situation first before you go ahead and use it.
Here are the three examples of the emergency fund uses that you need to think twice before spending on them.
When there is a financial opportunity.
There is an interesting article in Investopedia.com about emergency savings being a bad idea. The author said that putting your money in a savings account will restrict its growth. This is probably the reason why some people tend to use their emergency fund to help them fund a financial opportunity. While investing to grow your money is okay, make sure that you put your funds somewhere it can be easily liquidated. That way, if an emergency strikes, you can easily take the money and use it to survive a disaster.
When you have unexpected home and car repairs.
Most people will think it is okay to use your emergency fund for home and car repairs. But here’s the thing – these are not unexpected expenses. If you know that your car’s transmission needs replacement, this is something that you can monitor and prepare for. The same is true for any repair or maintenance expenses that your home requires.
When you need to buy basic necessities.
Unless you lost your job, never use your emergency fund to buy basic necessities. If you find yourself in a situation wherein your money cannot afford to spend on basic commodities, then you should know that there is something wrong with your budget. Buying your everyday needs should not be an emergency. It should be something that your finances can easily accommodate. There might be an area in your finances that requires you to spend more than you should. Or maybe your lifestyle is beyond what you can afford. This may be a sign that your finances is not being used correctly.
It is true that saving can literally save your life but only when it is available when you need it the most. Make sure you decide on what is the right way to use your emergency fund. Just because you run short of money, that is enough reason to tap into your emergency resources. Be strict and develop self control. That is how you can hope to have a secure financial future ahead.