Your commitment to building an emergency fund has been rewarded with a healthy financial buffer. If you’ve been following the general advice regarding the size of a “rainy day” fund, you should have saved at least three-to-six months worth of living expenses.
But, when should you actually tap into this emergency fund? What is considered a financial emergency?
Each person has his or her own ideas of when it makes sense to access this money. Because of this, not everyone ends up using an emergency fund in the way for which it is intended.
The Wrong Way Wreaks Havoc
Poor spending habits and lack of financial discipline could result in depleting an emergency fund on non-essential purposes.
For example, you come across a sale to purchase the newest top-of-the-line TV, normally retailing at $4,000, at a 50% discount. You’re cutting the cost by $2,000 — that’s a good chunk of “savings.” It would appear nonsensical to go in on this very rare deal. As it is a such-as purchase, you did have to dip into your emergency fund to make the purchase.
This is an example of the incorrect use of an emergency fund. So, when does it make sense to use it?
When to Use an Emergency Fund
Again, because the definition of a financial emergency can be quite subjective, it is best to follow a few rules when determining the right situation to use your hard-earned savings.
1. For Keeping Your Shelter
You have to keep a roof over your head and maintain a habitable living environment.
So, when an unexpected home repair or expense arises, an emergency fund helps make it happen. Addressing these problems early is likely to prevent further damage to your living space, which may end up costing more money in the future.
Some examples include:
- A tree branch falls through part of your home
- Heavy rain causes flood in your first floor apartment
- Your water boiler stops operating correctly
- Or, your living situation changed without warning and you are forced to find a new place to live.
Moving expenses can be costly. And, don’t forget that you usually need to have enough money for a security deposit and first month’s rent when you’re looking for rental properties.
2. If There is a Danger to Your Health
Anything that poses a danger to your health and well-being is a clear reason for using your emergency fund. Medical care can be rather expensive, but your health is of utmost importance. If a healthcare bill needs to be paid off, do it. After all, if you’re not healthy, you may not be able to perform your job, which hurts your ability to maintain an income.
3. To Protect Your Income
You have plenty of expenses and that means you need to have income to sustain them. Therefore, you must make sure that you’re able to earn income. If there’s any sort of obstacle that may prevent you from doing your job, it’s a financial emergency.
One of the common cases is a car repair. For many people, they have to drive to work on a daily basis. If their car breaks down, they could have trouble getting to work — putting their job (and income) in jeopardy. So, using an emergency fund to pay for the repair makes sense here.
There are other situations where you have to pay to ensure you can continue to earn income, such as:
- Freelancers who need a computer to work but the laptop just died on them.
- You found a new job and need to pay for relocation expenses.
4. If You Lost Your Job
When you lose your job, your income is gone. You need a financial buffer that allows you to continue paying necessary living expenses until you’re able to secure another job. That’s why the typical emergency fund should be three to six months worth of vital expenses, including rent, utilities and food.
Several months of savings may seem excessive, but the job market can be unpredictable. You want to be in safe financial position that allows to you survive — for an extended period of time without money coming in so it’ important to guard your emergency savings.
About the Author: Simon Zhen, research analyst for MyBankTracker