When it comes to good money management, having an emergency fund is right up there as the step number one. It helps you handle bills, repairs, and big purchases without having to take out an installment loan. But not all expenses are deserving of these savings. As the name suggests, your emergency fund is resting snuggled in a corner to help you with emergencies.
If you aren’t sure what counts as an emergency, let me help you figure.
What Are They?
Your emergency savings is a specialized fund of short-term cash you can access at a moment’s notice. This means investments and mutual funds don’t count. These take too long to liquidate for your needs in a financial disaster.
Typically, you’ll want anywhere between three to 12 months’ worth of expenses set aside. Reaching the latter goal gives you a large cushion should something affect your ability to earn a living for a full year.
Until you build up these funds, installment loans may work as a backup, but read up on their terms and conditions before you use these online loans. You can find informative financial advice for free here to learn more about how installment loans work.
3 Questions to Ask Before You Spend out of Your Fund
The next most important part of this fund is knowing when to use it. If you aren’t sure what constitutes as an emergency, ask yourself the following three questions:
1. Is it Unexpected?
Your emergency fund is designed to help you cover those expenses that come out of nowhere, leaving you surprised and uncomfortable in terms of your budget.
Engine trouble could be one of these unexpected expenses. If you’re driving along one day when your hood starts to smoke, and you may need to tap into your fund to pay the tow truck and mechanic.
Birthdays, anniversaries, or holidays, on the other hand, aren’t unexpected. These arrive at the same time every year, giving you enough warning to budget for them in advance.
2. Is it Necessary?
As a general rule, you should only use your emergency fund on something you need — something that could risk your health or safety if you don’t pay it.
Let’s take a look at medical bills as an example. If you need stitches after cutting yourself while making dinner one night, your trip to the clinic isn’t up for debate.
But if you’re thinking about going to the clinic for Botox injections, reconsider using your emergency fund. You can live without this luxury treatment.
3. Is it Urgent?
The urgency of your bill or purchase also factors into whether it’s worthy of your fund. Don’t confuse the pressure to buy or fix something quickly as reason enough.
Let’s say you see an amazing deal on HD TV screens, promising 70 percent off as long as you buy one this weekend. This limited-time offer isn’t enough to warrant using your fund.
Now, if your furnace breaks down in the middle of winter, it’s a different story. You need to act fast if you want to stay warm and prevent your pipes from freezing. You may need to repair it within a day or two, regardless of what cash you have on hand. Then using your emergency fund makes sense.
Anytime you’re tempted to tap into your fund, ask yourself each of these questions. Working through the answers will help you determine if your bill or repair is truly worth cashing in your funds, or if it’s better left for another day.
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