One of the most common financial advice is the establishment of an emergency fund. This advice is very valid because having an emergency fund is an important component of personal financial planning. If you want to be prepared for unexpected events that require instant funding, you need an emergency fund.
Something breaks, wears out or costs more than your cash at hand can handle. When that happens, where does the extra money come from? Typically, it should come from your emergency fund. An emergency fund is a readily available source of assets to help you navigate financial dilemmas, that aren’t part of your everyday budget. The purpose of having an emergency fund is to improve financial security by creating a safety net of cash that can be used to meet emergency expenses. According to most financial planners, an emergency fund should contain enough money to cover between three and six months’ worth of expenses.
When you have a large expense to deal with, you’ll probably consider whether you’re going to have to pay the bill with your emergency fund. However, before doing so, you need to ask yourself three simple questions to guarantee that the event qualifies as something you created your emergency fund for in the first place.
- Is it unexpected? Life has a couple of surprises that we could all live without. If an event happened suddenly, in a way that could not be predicted or planned, then you should consider using your emergency fund.
- Is it urgent? If something happens and you have a fleeting window to make a decision and commit funds to solve a problem, then consider the event as an emergency. When there’s an immediate need, the last thing you want to worry about is how you’re going to pay for it. This is what your emergency fund is for.
- Is it necessary? Necessities are often confused with wants, but the two are miles apart. If your car breaks down and that’s the only way you can get to work, you need to get it fixed because that is an emergency. On the other hand, if you’re tired of your current cell phone and want to upgrade to the latest with your emergency fund, think again.
If you can use the above questions to inform your thinking process when looking at a major expense, you will be willing to make the right choice when it comes to your emergency fund.
Now that we have set up a structure to guide decision-making, here are some instances where your emergency fund should definitely be used.
What happens if you get to work one morning and find out that you’re not going to be an employee at the end of the month? If you suddenly got laid off from your job, your emergency fund is your best bet for staying afloat while you look for a new job. A fully financed emergency fund can help you to cover your bills until you can find a new job.
We need our cars to move around, either to get to work or to buy groceries at the supermarket. Even when you’re taking care of your car with regular maintenance checks, something can still go wrong. So, what do you do when your car breaks down? A car breakdown is certainly a critical event. Use your emergency fund to get your car to a mechanic for repairs, as this is definitely an emergency expense.
Should you suddenly require urgent medical attention, you’ll want to be able to pay for those expenses without going into debt. Medical attention isn’t something that can wait until you feel as though you can “afford it.” Although many people have health insurance, it sometimes does not cover all the medical costs that may arise if you get suddenly sick or need surgery. Therefore, sudden, important medical expenses are something to consider using your emergency fund for.
Although you probably know that residing in a house requires spending money to keep your it in place, a major repair is never a welcome event. When you need to replace a water heater, fix broken windows, or even replace a door, you’ll be glad you have set aside an emergency fund because it will surely come in handy.