You cannot be sure of what you will face in life, but you can at least financially prepare for unexpected surprises by building an emergency fund. These savings, which should be kept separately from regular savings, should ideally be enough to cover between three to six months of living expenses. If you experience a pay cut, lose your job, or have a large unexpected expense, the emergency savings act as a lifeline to save you and you won’t have to use a credit card.
What not to spend your emergency fund on
Of course, the emergency fund is your money. But once it is allocated for emergencies, you are bound to spend it only when absolutely necessary.
Recurring and Expected Expenses
You may be surprised by unexpected expenses and sometimes feel they are truly emergencies. However, annual and routine expenses can and should be planned alongside regular monthly expenses. When building your monthly budget, consider any quarterly, semi-annual, or annual bills that will be due in the coming months. For example, you should always plan for:
- Holiday and birthday gifts
- Annual vehicle registration
- Back-to-school shopping
- Property or income taxes
Note: Not every expected expense has a date telling you it is coming. Keep separate savings for incidental unexpected costs such as routine car maintenance, minor home repairs, a medical bill copy, and seasonal clothing shopping for kids.
Unnecessary Spending
Before touching your emergency fund, always ask yourself if the money will go towards something essential for living. Recreational spending should always be funded through regular wages, side income, or separate savings. No matter how much of an emergency you may feel, your emergency fund should be off-limits for things like:
- Phone upgrades
- Clothing upgrades
- Vacations
- Flash sales
- Someone else’s emergency
Large Financial Goals
Building an emergency fund is a financial goal in itself, not a source of financing for another financial goal. If you deplete your emergency savings for a major expense, you will have nothing to cover a rainy day, and what seems like a sound financial decision at the time may turn into a significant mistake. This means you should not use your emergency fund for:
- Down payments on a home or car
- Startup business costs
- Early retirement
Note: Confusing wants with needs is an easy way to spend your safety net on unnecessary expenses. Remember, needs are the things you require to survive, keep your job, or protect your assets; while wants are upgrades to your lifestyle.
What the true purpose of your emergency fund is
Of course, at times you may find yourself in the exact opposite position, where you are completely afraid to touch your emergency fund, even when it is truly necessary. As a general guideline, you can utilize your emergency savings for unexpected, necessary, and urgent spending. This includes:
- Living expenses after losing a job or pay cut
- Major car repairs after an accident
- Emergency home repairs
- Essential emergency medical expenses
- Unexpected and necessary travel
These are the situations your emergency fund was built for.
“If it becomes necessary to use the emergency fund, the use should be for necessary housing, food, and transportation expenses,” recommends Jason Epinger, President of the Alabama Market at Citizen Trust Bank. “It is important to remember that if the situation is difficult enough to resort to your emergency fund, it is essential to adjust spending habits to allow for maximum use of those funds.”
Note: Even in genuine emergencies, exploring other options before resorting to your emergency fund can help you preserve your savings. This includes eliminating excess spending and reaching out to creditors for financial hardship options.
Replenishing
Building an Emergency Fund Afterwards
If you have to use your emergency fund, replenishing it is essential to ensure you have access to supplies the next time you need them. After experiencing a financial blow, you might even decide to save a little more than the recommended six months of living expenses.
Keeping your monthly spending limited can free up some room in your budget to start rebuilding your emergency fund. If necessary, it’s acceptable to pause your other financial goals for a few months while you bring your safety net back to a comfortable level.
Was this page helpful? Thank you for your feedback! Tell us why! Last
Sources:
Consumer Financial Protection Bureau. “An Essential Guide to Building an Emergency Fund.”
Source: https://www.thebalancemoney.com/when-should-you-use-your-emergency-fund-453900
Leave a Reply