When Do You Use Your Emergency Fund?

Hopefully, you’ve followed our frequent advice to establish a savings account so that you can quickly access funds in an emergency. And with a possible recession looming, or perhaps already arrived, we know that some people will need to dip into their emergency stash of cash.

But what constitutes an “emergency”? You might think it would be obvious, but when hard times come on the heels of good times, we can get a little mixed up with regard to needs versus wants. When is the appropriate time to access your emergency cash?

First, we must say that there are some expenses which are never considered emergencies, no matter how badly you might desire them. Never dip into your rainy day account for expenses like a vacation, or anything that would be considered a “fun” purchase. The same goes for paying debts; those should be worked into your monthly budget already.

As for any other unexpected expense that pops up, follow this line of questioning to determine whether it warrants accessing your emergency fund:

• Is this really necessary, or can I get by without it?
• Is this the only way to pay for it?
• Is this expense unexpected, or do I have time to prepare for it?
• Is this expense truly urgent? Can it wait?
• How much of my emergency fund will I need to withdraw?
• How long will it take to replace these funds in my emergency account?

And remember to hold yourself to a strict definition of “urgent”. For example, a medical bill might seem unexpected. And if it’s quite large, you might feel pressure to get it paid off quickly. But in the vast majority of cases, you can make a payment arrangement with the provider. You should also review that bill carefully to see if some expenses might be removed or reduced; medical bills are notoriously inaccurate.

Finally, you should try to avoid making rushed decisions. Give yourself a day or two to mull it over, because many things that seem like emergencies turn out to be less urgent than we first believed

Let’s discuss establishing an emergency fund at your next appointment, and we can answer any other questions you might have about financial preparedness.