Emergencies happen. This is why you should have an emergency fund. But when should you dip into it?
Don’t panic if you don’t have one right now. What you can do is start saving now. Even just $10 per month is a start, but aim for $50 to $100 per month if you can.
When it rains, it always seems to pour. The boiler breaks down, the car needs a new battery, your kid ends up with a hospital expense that you weren’t expecting. It all comes in threes, right? But before you even touch that emergency fund, you need to make sure it’s a genuine emergency.
This isn’t about what you want but about what you need. Here are four questions I always ask myself before we touch the emergency fund.
Is it an unexpected purchase?
Let’s start with the type of purchase you’re dealing with. Is it your child’s birthday or is it Christmas? These things come around every year. You should be prepared for this.
We save up throughout the year for Christmas. $50 is put away every month for this specific need. Birthday presents are kept small, usually a treat to the movies or a favorite restaurant. Kids don’t need a lot. They’ll tell you they do, but you know better!
Unexpected purchase are like a medical bill or your car breaking down (although good maintenance will protect you from this). They’re purchases that you weren’t planning for at all—and in some cases, couldn’t plan for.
If it’s not an unexpected purchase, then you shouldn’t use your emergency fund.
Muddy Waters Money Hand Crafted Word Jar.The Original Word Jar (Emergency Fund)
Has something unexpected happened?
The only time I’d understand dipping into your emergency fund for some normal payments (like bills) is if something unexpected has happened. We cut back on overpaying our car loan when the global pandemic hit to make sure extra money went into the emergency fund just in case. We had no idea if either of our jobs would hold. Too much was uncertain.
The global pandemic was something nobody saw coming until it was too late. You may lose your job because of a recession or because a company is having to close its doors due to financial reasons out of anyone’s control. This puts your whole family on edge. Finances are strained.
These job losses and pandemic problems are usually short term. Dipping into the emergency fund for a couple of bills is understandable, but in this case, you need to move onto the next questions first.
Is it a necessary purchase your emergency fund is needed for?
The electricity bill or grocery shop in the middle of a pandemic? This is going to be a necessary purchase. That dress because it’s in an online sale? Nope!
You need to be honest with yourself about the type of purchase. Is it a necessary one? Will it be life or death if you don’t get something? Will you end up losing the roof over your head or could your car be repossessed? Things like this are necessary purchases.
This isn’t about keeping a luxury lifestyle. Sometimes you do ned to cut back to the bare minimum. But if you’re struggling just to do that, then it could be classed as an emergency.
Does the purchase need to happen now?
Before you do make the purchase, you need to assess when it needs to happen. So the iPad broke. Your child needs to do their schoolwork but there’s an older iPad that still works in the house or they can do it on your computer. Instead of getting a new iPad out of the emergency fund, your child can use something else while you save up for what they need. And in normal circumstances when it’s not a global crisis, libraries will be open so you could take them there to do their homework!
You’ve lost your job and you need to make the annual home insurance payment. This does need to happen now. I don’t recommend anyone not having home insurance. So, this would be classed as a necessary purchase that needs to happen right now.
Your air conditioning has gone and it’s 110 degrees outside. Yeah, that’s a purchase that needs to happen now. If your air con broke in the middle of winter, you can save up for it (as long as it didn’t affect your heating, of course!).
You need to decide if you can save up for your purchases or if they have to happen right away. And if they have to happen, were they things you should have saved up for in the first place? Are they necessary purchases?
Don’t just dip into your emergency fund now and then. It’s for emergencies only, so treat it that way.