Having an emergency fund is a foundational part of sound financial health. After all, while you can predict and control many aspects of life, there are also plenty of other, unexpected factors that can appear out of nowhere and potentially disrupt your financial situation. Having an emergency fund allows you to take those unexpected — often unwelcome — blows in your stride without having to rely on debt-inducing financial remedies.
It’s usually recommended to have the equivalent of around 3 – 6 months of living expenses set aside in your emergency fund. But what should you be using — and not using — the fund for? Let’s take a look.
Do: Loss of Income
Losing your job can be pretty scary, especially if you’re unsure if you’ll be able to find another job quickly. After all, those bills still need to be paid regardless of your employment status. Having an emergency fund ensures that you can meet your key expenses while you look for other work. For instance, if you have six months’ worth of living expenses tucked away, then you’ll have six months to find a new job.
Pro tip: Close your wallet and reduce unnecessary expenses if you lose your job. You’ll likely find that you can stretch out another month of living expenses just by avoiding spending.
Don’t: Opportunistic Purchases
Every now and again, you’ll come across a deal that seems too good to pass up. Maybe you find your dream car being sold for a bargain price, or you’re given the opportunity to join an awesome trip that you’ll remember forever. It can be tempting to use your emergency savings to fund these purchases, but it’s best not to. Why? Because they’re not emergencies! Try to find other ways to pay for them without touching your savings, and if you can’t, then just accept that it’s not meant to be this time!
Do: Illnesses and Injuries
Your emergency fund can help tide you over if you have an illness or injury that prevents you from working, results in expensive healthcare costs, and incurs other expenses. You can use the cash to get the medical help you need to begin the road to recovery. Be aware, however, that it might be possible to recover the emergency fund cash you spent, especially if your healthcare-related expenses are related to an injury caused by an injury that wasn’t your fault. In that instance, a personal injury firm like GDH Law can help you fight for compensation. So even though you’ll use your emergency cash initially, it might still end up back in your account.
Don’t: Cosmetic Home Improvements
There are instances when your emergency fund can come to the rescue if you have a home-related issue. If your roof collapses or you experience flooding, then use your emergency fund cash until the insurance claim is settled. Cosmetic upgrades, however, are not a smart way to use your emergency fund. The bottom line? If it’s not an emergency, then leave your money where it is!
