An emergency fund is one of the most important things in your financial toolkit. This extra bit of cash can help you handle unexpected bills, repairs, and even big purchases without needing to rely on short-term personal loans.
It can be a relief knowing you’ve tucked away some savings at a time like this. Inflation is at a 40-year high, so everything in your budget is taking up more cash. But if you’re constantly using your emergency fund to cover inflation, will you have anything left for a true emergency?
But what if your emergency fund is running low? You may be tempted to dip into it for non-emergency expenses, but that’s not always the best idea. Here’s what you need to know about using your emergency fund.
Why is an Emergency Fund Important?
An emergency fund is important because it gives you a cushion to fall back on in case of an unexpected expense. Unexpected expenses can include anything from a car repair to a medical bill.
If you don’t have an emergency fund, you may need to put these expenses on a credit card. This can lead to debt and high interest rates, which can be difficult to pay off. An emergency fund can help you avoid this situation.
You can’t always stretch your paycheck to cover the unexpected, like patching a hole in your car’s tire. Your emergency fund can bail you out in this situation.
Most financial advisors recommend saving three to six months of living expenses. Once you reach this goal, you’ll be in a better position to handle the odd extra expense without worrying about your finances.
What if Your Emergency Fund is Low?
Building up six months’ worth of expenses takes time. You won’t always have the money you need when disaster strikes. There’s also going to be a time when you don’t want to withdraw from this account, knowing how hard it is to rebuild.
If your emergency fund is running low, there are a few things you can do:
- Review your budget and see where you can cut back on expenses. This will give you extra cash to put towards your emergency fund.
- If you have any investments, consider selling them off. This should be a last resort, as you don’t want to lose out on potential earnings in the future. However, if you need the money now, this may be the best option.
- Take out a short-term loan from a friend or family member. Be sure to draw up an agreement so there are no hard feelings later on. You’ll also want to make sure you can afford the repayments.
- Use a credit card. This should only be done as a last resort, as you’ll likely end up paying high interest rates. However, if you can pay off the balance quickly, this may be an option.
- Ask your employer for an advance on your paycheck. This is usually only available to those who are salaried employees. If you’re paid hourly, this likely won’t be an option.
- Take out a personal loan. Personal loans usually have lower interest rates than credit cards, so this may be a better option. Be sure to compare rates from different lenders before taking out a loan.
What if You’re Dealing with an Emergency Right Now?
What happens if you have to replace your water heater before you manage to sock away $100? In an emergency, online short term personal loans may work as a backup to lackluster savings.
Short term personal loans come with quick, convenient online applications you can fill out anywhere you get Internet. For anyone who works during usual bank hours, this flexibility can help you avoid missing work to apply for a loan you might not get. Instead, you can apply whenever you have time, even in the middle of the night.
How to Tell if an Expense is Emergency Fund Worthy?
Not everything that comes up is a true emergency. You should only use your emergency fund for expenses that are absolutely essential. Here are a few examples of what may be considered an emergency:
- A major car repair that can’t wait
- An unexpected medical bill
- A job loss or reduction in hours
- A natural disaster that damages your home
- An funeral or other unexpected travel expenses
These are just a few examples of what may be considered an emergency. If you’re not sure if an expense qualifies, it’s best to err on the side of caution and not use your emergency fund.
With inflation bumping up the price of things while also diminishing the purchasing power of your money, it can feel like stocking up on everyday items is an emergency. But is it? Before dipping into your emergency fund, ask yourself these three questions:
1. Can You Expect It?
While inflation might surprise you at first, it’s going to stick around for a while.
In other words, you should start updating your budget to reflect these new prices rather than relying on your savings to fill the gap. Otherwise, you’ll use up savings faster than you can replace them, leaving you vulnerable to true emergencies.
2. Can You Live Without It?
Another good thing to think about is how necessary an expense is. Visiting a dentist over a toothache is crucial to your overall health, so you shouldn’t avoid this appointment, even if you can’t afford it. A trip to whiten your teeth, on the other hand, isn’t essential – it’s a luxury.
3.Can You Postpone It?
Timing is everything when it comes to using savings. Don’t confuse urgency with the pressure to buy something right away. If you can reasonably delay your purchase without risking your health or safety, it’s better to postpone it.
But let’s say your car breaks down and you have no way to get to work anymore. You may tap into your emergency fund or use short-term personal loans to get back on the road right away.
Think of your emergency fund as if it were a short-term personal loan. It’s good to have as a backup in unusual circumstances, but it’s not something you want to rely on month to month.
Saving up for an emergency fund can take time, but it’s worth it. Having this money set aside will give you peace of mind, knowing you can cover unexpected expenses. Review your budget and see where you can cut back on expenses to help speed up the process. And if you find yourself in a situation where you need to use your emergency fund, be sure to replenish it as soon as possible so you’re prepared for the next time something comes up.