When to use your emergency fund
An emergency fund is an essential safety net that everyone should have for a more secure financial future. It can help you weather unexpected expenses, job loss or other financial emergencies without having to resort to high-interest loans or take on debt.
Deciding to use your emergency fund or not can be tricky: you want to have it for when you need it, but it’s crucial to use it wisely, so how do you know when a situation is truly an emergency expense and when it’s appropriate to use your emergency fund? Before you use your emergency savings, ask yourself these 3 essential questions to help evaluate whether the situation calls for it:
Question 1: Is it unexpected?
The first thing to consider is whether the event/expense was unexpected; that is, you didn’t see it coming. Emergencies are things that you couldn’t have predicted or known were coming, but your emergency fund makes it possible to financially prepare for such an occurrence.
For example, sudden medical bills, car repairs or home damage from a natural disaster are things that you couldn’t have anticipated, but in these instances, having ‘just in case’ money will help you pay for those unforeseen costs, so you’re not financially impacted (too much).
However, if the expense is something that crept up on you and you could’ve anticipated it, such as annual insurance premiums increasing, maintenance or property taxes, then that’s not an emergency and shouldn’t be paid for out of your emergency fund.
Question 2: Is it necessary?
An expense can be unexpected but not essential to cover. Necessity speaks to the difference between wants and needs – consider how not paying for this unexpected event will affect you.
For example, if your car breaks down, it would be a necessary expense to repair it; otherwise, you’ll be without transport to work. However, if you feel like your car is getting old and that you’d like a new one (or will need a new one at some stage), that shouldn’t be a reason to dip into your emergency fund.
Things that you might badly want might feel like necessities, such as a new piece of tech or vacation or pampering, but it’s best to save for it separately.
Question 3: Is it urgent?
Urgent expenses are those that require immediate attention and can’t wait until you’ve saved up enough money to pay for them. For example, if your roof is leaking and causing damage to your home, that’s an urgent expense that needs to be addressed right away. Or if you cracked a tooth and you’re in a lot of pain, you want to visit the dentist as soon as possible because the problem is unlikely to go away.
On the other hand, if you’re considering using your emergency fund to buy a new outfit for a last-minute event, that’s not urgent, and it can wait until you’ve saved up enough money.
By asking these 3 key questions, you can create a framework for deciding whether a situation warrants using your emergency fund, helping you make informed financial decisions and helping you avoid dipping into your emergency fund for non-emergencies.
Disclaimer: This article is solely intended for information. It does not constitute financial, tax or investment advice or recommendation. Please speak to a financial advisor or registered financial professional before making any financial decision(s).
Standard Bank, its subsidiaries or holding company, or any subsidiary of the holding company and all of its subsidiaries make no warranties or representations (implied or otherwise) as to the accuracy, completeness or fitness for purpose of the information provided in this article or that it is free from errors or omissions.
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