Everyone should have an emergency fund. The unexpected happens and you have to be financially ready for it. When should you use your emergency fund? There a few questions that you can ask yourself before you use your emergency fund.
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Having a small emergency fund while you are still paying off debt is a terrific way to make sure you will stay on track with your budget. Many often call it a “baby” emergency fund. The recommended amount is between $1000 – $2000, it really depends on your income level. Keep that smaller Emergency Fund fully funded while you are paying down debt. It will make a huge difference!
This emergency fund takes the place of sinking funds until you can get them budgeted for. Budgeting is a process, and nothing is fully funded overnight.
While getting out of debt, you might not have rainy day savings or sinking funds started so use this baby Emergency Fund if the washer breaks or for emergency pet care or roof leaks. Once your commercial debt is paid off and you have your sinking funds established, your Emergency Fund will only be used for unpredictable emergencies, like a sudden job loss or debilitating illness.
Should I use my Emergency Fund for that?
There are a few questions that you need to ask yourself before you use your emergency fund.
- What is a true emergency for me?
- Is this a necessity?
- Level of urgency?
- Can I pay for this in a different way?
What is a True Emergency for me?
Did your car blow a tire on the way to work? What if the unthinkable happens and a water pipe in the bathroom springs a leak? Do you need to fly across the country for a funeral? These examples could definitely constitute a true emergency. Great pair of shoes on sale? NOT an emergency. Your grandmother passed away in California and you live in New York, that is a once in a lifetime event and a true emergency.
Is this a necessity?
Can I live without this? You can probably live without your car for a short amount of time, but any longer than a few days would be an emergency for most people. A vehicle is necessary for most people to get back and forth to work. If you are a two car family, you may be able to finagle that amount into the next paycheck and not touch your emergency fund.
A trip to Disney World by the time your children turn 10 may feel like a necessity, but that is not an emergency. That trip is something that you would plan for over the course of a few years.
Living without an air conditioner in the middle of a heat wave can sure feel like a necessity. That is a very personal decision, and many health conditions can warrant an air conditioner in extreme heat.
Level of urgency?
Did you all of the sudden get a terrific promotion at work and have to move out of state? That is an urgent need.
Your tooth cracks while eating a walnut and you have to have emergency dental surgery, that is an urgent need.
Do not confuse your urgent need with a want that you have had for a long time. Desiring something for a long time can make that want seem urgent as time goes on.
Can I pay for this a different way?
Do you have a few sinking funds or rainy day funds set aside already? You can use those funds before you decide if you should use your emergency fund or not.
Do you have a HSA (health savings account) set up for medical needs? You can use the money in your HSA instead of your emergency fund for a medical necessity. Many people are nowadays using their HSA as investment account, so this is another very personal decision.
Do you keep a buffer in your checking account? If so, you may be able to pay for your emergency in that way instead of using your EF. Then you can build your buffer up while you still have that safeguard of an emergency fund in place.
Will you be reimbursed through insurance? We once had a tree fall on our house and it caused over $30,000 worth of damage. Now, we did not have that big of an emergency fund set up at the time, but we were able to pay for some things out of pocket and then get reimbursed by the insurance company.
Using your Emergency Fund
It truly is a personal decision and one that you have to weigh very carefully, with a significant other as well if you have one.
Some people decide to use their credit card as an emergency fund. I do not recommend this since it can become a vicious cycle and you are never really planning on having an emergency.
You should always have a plan for every single dollar that you earn, including emergencies.