Though most Americans aren't prepared to handle a financial emergency, the good news is that nearly one-third of U.S. adults have enough cash socked away to cover six months or more of living expenses. In fact, given that the basic requirement for an emergency fund is to replace anywhere from three to six months of living costs, some folks are, in fact, ahead of the game.
But while having that money in place is certainly a good starting point, you may be tempted to use that cash for non-emergency purposes -- even if unintentionally. For example, though tapping that fund to pay for a vacation is a clear misuse of your emergency savings, where does your car insurance payment, or new dishwasher, fit into the equation?
The purpose of your emergency cash is to cover an actual emergency. So if you're not sure whether you're looking at one, here are a few questions to ask yourself.
1. Is this an ordinary expense?
The purpose of an emergency fund is to cover unplanned expenses. Examples of such include your heating system going kaput in the heart of winter or slipping on ice and getting a $1,200 hospital bill as a result. None of these are costs you could've predicted, and if you don't have enough leftover cash in your paychecks to cover them, you're more than justified in using your emergency fund.
On the other hand, if you forget about your once-a-year homeowners' insurance premium, and one day get that $900 bill in the mail, that's not really what your emergency cash is for. Yes, the expense may be unexpected in that it caught you off guard, but it's not like you didn't have a chance to prepare for it in advance. Rather, you simply forgot.
Of course, if you're already in that type of situation and don't have another option for paying that bill, then you'll need to dip into your reserves, but if that's the case, make sure this type of scenario is a one-time thing. Comb through your records, make a list of your one-off expenses, and figure out when you'll need to pay for then. Then, work on setting extra money aside each month so you're not dipping into your emergency cash to cover bills you know about.
2. Do I need to come up with this money right away?
Just as your emergency savings should be used for unanticipated expenses, so too should they be reserved for situations where you need to hand over a chunk of money right away. Now if your car completely dies on you and you absolutely need an automobile to get to work, then by all means, withdraw from your emergency savings to cover your new vehicle's down payment. But if you can access your office by taking the bus, or bumming rides with colleagues for a number of months, then you should really hold off on dipping into your reserves, and instead work on saving up for that down payment.
3. Do I have other options for generating this cash?
Building an emergency fund is no easy feat, so rather than jump to withdraw from it on a whim, consider whether there's an alternate means of coming up with the money you need. Depending on the type of expense you're looking at, you may be able to work a side gig for a couple of weeks and cover your unplanned bill with that added income. Or you might have the option to sell some stuff and cover your expense that way.
Obviously, you should only employ the latter approach within reason. If you have six months' worth of living expenses in the bank, and you need to come up with $1,000 out of nowhere, you shouldn't feel compelled to sell your dining room set and eat on the floor for three months till you come up with the cash to replace it. But if you're looking at a $400 bill, and there's a high-end, rarely used treadmill sitting in your basement that you've meaning to sell anyway, it's worth going that route before you withdraw from your savings.
Even though your emergency fund is there for a reason, it always pays to think twice before hitting it up, because once do, you might struggle to rebuild your reserves. On the other hand, as long as you recognize the difference between a true financial emergency and poor financial planning, you shouldn't hesitate to dip into your savings when a true need arises. It's a far better move than taking on debt or uprooting your life just because circumstances don't happen to align in your favor.
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