Before You Spend Your Emergency Fund: Three Questions to Ask Yourself
In the past year there has been increasing talk and expectations of a recession, whether or not we experience harsh setbacks due to this or not, don't you think it's best to be prepared anyway?
Emergencies can strike anyone at any time, from medical bills to car repairs or job loss. That's why having an emergency fund is so important: a dedicated savings account for cover unexpected expenses without disrupting your long-term financial goals. Even with the best intentions, there may come a point when you must use that hard earned savings. Before spending all of those hard-earned dollars, here are three questions to ask yourself before spending them all.
Are You Sure This is an Actual Emergency?
Before spending your emergency fund, ask yourself whether it truly is an emergency. Determining what constitutes an emergency can be subjective, but it is essential to establish a clear definition for yourself. Generally speaking, emergencies are unexpected and essential expenses that cannot be funded with regular income - for example, car breakdown while needed for work could qualify as an emergency; on the other hand vacation or non-essential home renovation are not considered emergencies.
When assessing your financial situation, it's essential to be honest with yourself. It can be easy to justify expenses and convince ourselves they are emergency expenses when they may not be. So take the time to assess the situation and decide whether an expense is truly necessary and aligns with your priorities.
Will I Be Able to Replace the Money Soon?
After you've identified an expense as an emergency, the next question to ask yourself is if you will have enough funds available soon enough. Remember that your emergency fund should only be used for unexpected costs; once spent, it must be rebuilt again.
If a major financial setback or extended unemployment are expected in your future, consider whether or not to deplete your reserves.
Take into account your long-term financial objectives and the effect spending from your emergency fund may have on them. Establish a strategy for replenishing this fund as quickly as possible - this could involve altering your budget, taking on extra work or finding new income sources.
Are There Alternative Options?
Before using your emergency fund, explore all possible alternatives. Can you negotiate a payment plan or borrow from family/friend? Are there other ways to generate income or reduce expenses? Take into account all possible scenarios before depleting your emergency fund.
Remember, drawing from your emergency fund should only be a last resort. If there are other ways to cover expenses without depleting your savings account, that is always the better choice.
Finally, before spending any emergency fund, ask yourself these three questions: Is this truly an emergency? Will I be able to replace the money quickly? Are there other options available? Be honest with yourself and assess the situation carefully. Your emergency fund exists for protection - make sure it's used wisely.
In a wider perspective, having an emergency fund is only part of what makes up a comprehensive financial plan. It's essential to create a budget, save for retirement and pay off debt. By adopting these financial habits into your daily life, you'll be better equipped to handle unexpected events and reach your long-term financial objectives.
When I first began my career, I had very little savings and no emergency fund. One day, however, my car broke down and needed expensive repair - so I was forced to put the expense on my credit card with accruing interest charges. That experience taught me the value of having an emergency fund and being prepared for unexpected expenses. Now I save a portion of my income towards repairs/maintenance so if I use my credit card for something unexpected, it will be paid off faster.
Troy Barrow, LUTCF has been a financial professional for over 15 years. He has been successfully helping clients like you to achieve your financial goals.
Arlington Insurance Planning Services LLC (AIPS) was founded by Troy as an independent agency to provide tailored insurance and financial solutions to build, protect, and transfer the wealth of Career Professionals, Families, and Business Owners, as well as to provide access to a variety of well positioned companies to service their needs.
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