Emergency funds are an important part of personal financial planning. If you want to be prepared for unexpected events that require immediate financing, then you need an emergency fund. However, once you do have an emergency fund, what do you spend it on? After all, for many of us, almost everything looks like an emergency when you have a few thousand dollars sitting in the bank! If you’re not careful with how and why you use your emergency fund, you may not have the money you need on hand when a critical, unexpected event actually occurs. When should you use your emergency fund? Here are a few things to consider.
A Simple Test
When you have a large expense to deal with, you’ll likely consider whether you should pay the bill with your emergency fund. Before you do so, however, ask yourself three simple questions to ensure that the event qualifies as something you created your emergency fund for in the first place.
1. Is the event critical?
If something happens and time is of the essence, and you have a fleeting window to make a decision and commit funds to solve a problem, then you should consider that event an emergency and use your emergency fund to deal with it.
2. Is action necessary?
If something happens to your family, you, your home, or your car that must be addressed for life to continue as normal, that event should qualify as worthy of using your emergency fund.
3. Is the event unexpected?
Did the event unfold suddenly, in a way that was impossible to forecast or plan for? If the answer is yes, then this is the type of situation where you should consider using your emergency fund.
If you use these three questions to inform your thought process when looking at a major expense, you’ll be ready to make the right decision when it comes to your emergency fund. Now that we’ve established a framework for guiding our decision-making, let’s look at some examples where you should definitely use your emergency fund.
If you’re on vacation and have an unfortunate accident requiring medical attention, such as stitches after falling off a bicycle, this is the time to use your emergency fund. Getting your cut cleaned and stitched up at a local urgent care facility is critical if you want to avoid infection and to heal properly. Medical attention can’t wait until you feel as though you can “afford it.” An injury whether it’s during a vacation or not is certainly an unexpected event, not a routine expense you plan into your vacation budget. Sudden and important medical expenses are times to consider using your emergency fund.
If you’re facing a major home expense, it may also qualify as an emergency. For example, if your furnace breaks down in the middle of winter, it could leave you without heat and threaten to cause further damage to your plumbing via frozen or burst pipes. An event like this is critical; addressing the problem is necessary since you can’t live in a home without heat during the winter. Paying to repair a broken furnace isn’t factored into your budget each month, so it’s surely unexpected. An event like this is without a doubt worthy of your emergency fund.
Americans depend upon their cars for everyday life. We need our cars to get to work, to buy food at the supermarket, and to get to restaurants, sporting events, and other fun activities. What do you do when your car breaks down on the way to work? A car breakdown certainly qualifies as a critical event, even in terms of transporting it to be repaired; otherwise, the police will tow it, which will cost you even more money. Unless you live somewhere you can rely completely upon public transportation, repairing your car is necessary to carry on with life as normal. No one plans to be stuck on the side of the road, so a car breakdown is clearly an unexpected event. Use your emergency fund to get your car to a mechanic for repairs as soon as possible.
What happens if you arrive at work one morning and discover you’ll no longer be an employee by the end of the week, or your hours are significantly scaled back? No longer having a salary to pay your bills is a critical event you’ll have to address right away; failure to do so could lead to you losing your home or damaging your credit. After all, you have to keep paying your bills regardless of whether you have a job. Suddenly losing your job also qualifies as an unexpected event. Use your emergency fund to cover your bills until you can find a new one.
An emergency fund to fall back on can provide you with peace of mind and financial stability. Once you’ve built up your emergency fund, you should think about how and when to use it. So, take the advice provided here into consideration, and you’ll be ready to address critical, necessary, and unexpected events in your life when they occur.