So, you’ve saved up a pretty good chunk of change (three to six months worth of expenses) for any emergencies that may pop up down the road, just as your financial advisor suggested. That’s great! But now that you have a pretty pile of cash, you may be tempted to dip into it for non-emergencies. This is why it’s important to make a list of expenses that meet the criteria for true emergencies.
Financial obligations and daily financial challenges vary considerably from person to person, so being able to distinguish between what is and isn’t a true financial emergency isn’t easy. What may be a financial emergency for you might not qualify as such for your neighbor.
Understanding how to determine a true financial emergency from just another bill is key. Your emergency fund should only be used in certain situations, including paying your bills and living expenses, such as:
● Car payments
● Car repairs, both routine and unexpected
● Insurance premiums
● Urgent medical or dental bills, or vet bills for a pet
● Childcare costs
● Repairs to your home due to a fire or natural disaster (e.g. a hurricane)
● Unexpected bills related to the sickness or death of a loved one
● Job search expenses if you’re suddenly out of work
This list can seem pretty lengthy -- but it’s also helpful to use in estimating exactly what kinds of costs you may need to cover from your emergency fund. When estimating your 3-6 months of expenses, be sure to factor in surprises as well as bills that you may not pay every month (e.g. if you pay your car insurance premium in full once every six months).
In Bankrate.com’s recent “Money Pulse Poll,” respondents were asked how they tend to deal with unexpected expenses like $1,000 for an emergency room visit or $500 for a car repair. The responses were sobering -- only 38% of respondents stated they would be able to pay for the bill from savings. The rest would first seek another source of funding, including these methods:
● 26% would reduce spending on other things
● 16% would borrow the money from family or friends
● 12% would use credit cards
The point of an emergency fund is to give you access to cash so you won’t have to scramble to come up with the money, add to your debt, or raid your retirement account. So make your list of what qualifies as a true emergency, check it twice, and dip into another account for that much-needed “emergency” vacation to the Bahamas!
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