There are many benefits of saving money in an emergency fund, including the peace of mind this will bring to your financial situation.
But here is the problem: it is not always easy to determine when you should use this money and when you should leave it be.
To get on the right track, here are five questions to answer before using your emergency fund:
1. Is it an unexpected expense? It can’t be considered an emergency if you saw the expense coming from many months away. For example, the need to purchase Christmas gifts is not an emergency. After all, this holiday falls on the same day every year. Conversely, a large medical bill could be considered an emergency, as you didn’t see your injury or illness coming.
2. What constitutes an emergency? This is not the same for every person, so you need to answer this question based on your personal situation and beliefs. As you save in your emergency fund, create a list of situations in which you would spend the money. This doesn’t have to include everything, as you never know what the future holds, but you should have a basic idea of when it’s okay to dip into this account.
3. Is it urgent? If you are not faced with an urgent expense, something that has to be dealt with this second, you may be able to avoid using the money in your emergency account. It’s urgent to repair your vehicle if it breaks down. It’s not urgent to purchase new furniture just because you want it.
4. Is there a better option? It’s easy to turn to your emergency fund, but this may not be the best option considering all the details of your situation. Don’t hesitate to consider other ideas, such as using a credit card or other funds.
5. What are the consequences of using your emergency fund? For example, deduct how much you are spending from the total amount you have saved. With this number in mind, you will have a better idea of where things will stand once your emergency is in the rear view mirror.
Answer these five questions before using your emergency fund. The answers will help you decide if you are making the right decision.