Congratulations – you’ve got an emergency fund for those unexpected expenses that will crop up occasionally!
How will you know when to dip into it? Ask yourself these three questions. If you can answer Yes to all three – it’s a legit emergency. If you can’t, you may be sabotaging your financial freedom.
1. Is it an unexpected expense?
There are some things in life you can’t plan for:
- getting laid off from work
- an unplanned pregnancy
- being unable to work due to health issues
- leaky pipes causing water damage
You’re still going to have bills to pay if you get laid off from your job. But with an emergency fund you can continue to pay the mortgage, eat three meals a day, and buy gas for the car while finding your next great job. You won’t be stressed knowing you have a cash cushion to keep you afloat.
Expenses that you forgot to budget for or are recurring expenses aren’t emergencies. Stuff like:
- birthday/anniversary/Christmas presents
- property taxes
- back-to-school shopping
- visits to the vet
Kids always go back-to-school. Fido always needs shots once-a-year. Christmas is always in December. Property taxes are always due in January.
Budgeting for recurring expenses will make sure your emergency fund is left intact for real emergencies.
2. Is it a need?
People often confuse needs and wants. It’s easy to do. We can talk our brain into believing just about anything.
However needs and wants are light-years apart. They are like daytime and nighttime. Salt and pepper. Yin and Yang.
Needs are real emergencies.
Here are a few things you might want:
- Prom dress
- Lawnmower that’s on sale
- iPhone upgrade
- Dinner out when your friends are in town that you haven’t seen in 2 years
- Christmas gifts for the kids
- Victoria’s Secret semi-annual sale
I need a new car is only true if your current car:
- Will not start
- Will cost more to fix than the car is worth
Otherwise, you don’t need a new car; you just want one. And if you buy a new car every three to five years that’s something you should budget for by having a car fund.
If you have a car that drives, draining the emergency fund to purchase a new one is not an emergency.
Fixing a hole in your roof that’s leaking in the rain is a definite need. Painting the exterior of the house because you no longer like the color is a want.
Don’t sacrifice long-term savings for short term pleasures.
3. Is it urgent?
Ask yourself if the situation is time-sensitive or if it can wait.
Medical issues are usually urgent, but sometimes they aren’t.
In 2013, I got a concussion wakeboarding at a cable park (that’s what they told me, I still don’t remember). I was driven to the emergency room for an MRI. That little trip cost me $2,000.
As I’m working on this article, I have a crown that needs replacing. The dentist told me this six months ago, but he said I could wait. I know it’s going to cost me $1,200 to fix. While it’s necessary, it isn’t urgent.
Airplane tickets for a beach vacation that are on sale are not urgent. Why not? Vacations shouldn’t come out of your emergency fund – they aren’t emergencies. Even if your kids are driving you crazy – you need a vacation or you’re just going to explode – it’s still not an emergency. Like a new car, vacations come from a fund set aside for that purpose.
The furniture sale that ends next week isn’t an excuse to use your emergency fund for a new leather couch and loveseat. If you want new furniture, create an opportunity fund and build it up until you have the cash to buy it in full.
What happens if you raid your emergency fund then lose your job? It’s not going to be very comfortable sitting on your leather couch on the sidewalk after you get foreclosed on and don’t have a house.
If you found a legit emergency, spend the money and don’t feel guilty. That’s why you have the emergency fund!
Question: Have you had any unexpected, needed, and urgent expenses? Please leave a comment below.