Question: When is It An Appropriate Time to Use My Emergency Fund?
Answer: To fully grasp the answer to this question, you must understand the difference between a sinking fund and your emergency fund. If you don’t, you’ll always tap into your emergency fund for non-emergencies.
The purpose of a sinking fund is to set aside money during a specific period of time for a specific purchase. You can use a sinking fund for things like Christmas, insurance payments (if you’re not paying monthly), replacement cars, and annual subscriptions.
An emergency fund is for the unknown life events. It’s not always life events that you didn’t plan for, but what you couldn’t plan for that gives you permission to use your emergency fund. There are 3 main questions you should ask and be able to answer “yes” to before using your emergency fund.
Is it Urgent? The Macy’s 2-Day sale is not what we’re talking about when we say urgent. Neither is seeing an item that you’ve actually been saving up for go on sale.
What we’re looking for here are things like having an accident over the weekend and needing to visit the urgent care facility.
Is it Unexpected? As a reminder, things that are expected should be budgeted for and come from a sinking fund. Christmas is December 25th every single year. Just because you forgot to plan for it doesn’t make it an emergency.
An example of an unexpected expense would be having an accident and needing to cover the insurance deductible.
Is it Necessary? This is the one that trips people up the most. Remember, you want to take care of the four walls (home, food, transportation, and clothing), but that doesn’t give you a pass to buy thing that truly aren’t necessary.
The reason most people in America are living paycheck to paycheck is an inability to differentiate between wants and needs. We don’t want to be “most people”.
Upgrading your car with some nice chrome wheels isn’t a necessity, however, needing to replace a battery on the car that you use to get to work is. Keep in mind that each time you dip into your emergency fund for wants, you’re robbing yourself of needs AND peace later in life.
If whatever you’re facing allows you to answer “yes” to these questions, then feel free to use your emergency fund. After all, that’s what it’s there for.
If you don’t have an emergency fund or a plan to get one, our financial trainers are able to help you. Just book a session at the link below, and you’ll be on your way to becoming financially healthy.