It would be ridiculous to say that there isn’t one person out there who has never had a financial emergency. There might have been people who were more ready for it than others, but at the end of the day, we all run into unexpected expenditures. Whether it’s our cars breaking down on us or a random thing around our house that needs immediate repairs, the idea that we can avoid these moments is unrealistic so it’s best to prepare for them just in case.
That’s why an emergency fund is one of the best tools around in financial management because while it’s important to have a strong offense in building wealth, you equally need to have a strong defense.
Of course, according to Art Rainer’s 8 Money Milestones, it is recommended to we should have an introductory emergency fund of at least $1500 so that we can be sufficiently ready for most emergencies. However, once you have paid off all your debt (besides your mortgage) and saved up to your investing match at work (if you have one), it’s crucial that you increase that emergency fund to 3-6 months of expenses to protect yourself from a job-loss level emergency.
It’s also important that we remember what constitutes an emergency since most people can get that confused and end up spending their emergency funds on things that, frankly, should’ve either been expected or planned for in advance.
Here are 3 questions to ask yourself before you dip into that emergency fund that you worked so hard to save up:
1. Is this urgent?
Does this need to be fixed or bought right now or can we wait and save up for it? This is vital because if a so-called emergency can wait, it most likely doesn’t fall into that category.
2. Is this necessary?
Sadly, our purchases and debt struggles have proven that a lot of people struggle with distinguishing between a need and want. A new car is not a need, it’s a want. If you need transportation now, use your emergency fund to buy a cheap used car and then save the money that you would’ve used for a car payment and save until you have the money for a more reliable vehicle.
3. Is this really an unexpected expense?
An emergency fund at the end of the day is to protect ourselves from going into debt. There is a huge difference between getting fired and losing your income than forgetting to save up for Christmas one year. Birthdays and Christmas happen the same time every year, so these are not considered unexpected expenses, no matter how poorly we have prepared.
Remember that these questions will prevent you from using emergency funds on things that don’t fall into that category. If you can ask yourself these 3 questions and answer yes honestly to each one of them, go ahead and use those funds for whatever you need. But make sure once you use that money that you do everything in your power to fill it back up to where you left it.
There’s nothing worse than spending your emergency fund on a non-emergency only to find out that you don’t have any more money for an actual emergency that comes your way.
Make sure you have sufficient savings so that in times of scarcity, you can still give generously, save wisely, and live appropriately.