When is it okay to use your emergency fund?
Well all know that most personal finance experts will tell you to set aside three to six months worth of living expenses into an easily accessible account in order to cover emergency expenses. But how do you decide what is, and what isn’t an emergency?
The majority of the time, the question is easy to answer. A new iPhone is not an emergency. A weekend trip to Montreal is not an emergency. Fixing the scratches on your car, or getting new seat covers is not an emergency. However, if you get into a car accident, paying for the insurance deductible would probably be a cause where you would use your emergency fund.
But what if your $2,000 Macbook dies, and you need it to keep bringing in an income with your blog? What if your bicycle gets stolen? What if you get invited to a birthday party and you can’t afford a present, or you overspent this month and you know you won’t be able to pay your cell phone bill on the 31st?
Here are four questions to ask yourself before you use your emergency fund:
1. Can you cut out other expenses from your monthly budget?
Before you transfer money out of your savings account, take a hard look at your budget to see if you can move money around to cover the expenses. For example, could you go for a month without your Friday happy hour tradition with your co-workers, or skip out on your hair appointment? A few small sacrifices now might mean you’ll be able to cover the unexpected expense, and you won’t have to replace the money from your emergency fund.
2. Is it really an emergency?
There are often temporary solutions to problems that will allow you to keep functioning until you have saved up enough money to replace an item, or pay for an unexpected bill. For example, you might be able to get an interest-free grace period to pay off the bill, or if your laptop dies, you could borrow one from a friend until you’ve saved up enough money to replace yours – or you could use the computers at the library in the interim.
3. Can you increase your cash flow?
If you receive an unexpected expense, or you think you might not be able to pay a bill before the end of the month, instead of immediately turning to your emergency fund, are there other ways you can increase your income instead? Taking on extra hours at work, selling unwanted possessions, or finding a temporary job might get you through your emergency situation, without having to dip into your savings.
When I lost my job in March 2010, I was devastated. But despite having only $3,000 in my emergency fund, I wasn’t worried. My plan was to take on a part-time job in order to make my emergency fund last longer. I didn’t know how long I was going to be unemployed for, so having a part-time job helped me keep to a regular schedule, while still having the time to search for jobs and go on interviews.
4. Can you decrease the cost of the emergency?
Can you repair the item yourself, or having some do it for you, instead of replacing it? Do you have a skill that you can barter with someone in order to cut down the cost of the repairs? There are plenty of ways to decrease the cost of most emergency situations. For example, if you don’t absolutely need a top-of-the-line Macbook Pro, consider replacing it with a less expensive laptop, or buying one refurbished.
For me personally, I would do whatever it takes to keep my emergency fund in place. It took me nearly 5 years to finally get my emergency fund to $10,000, and the only reason I would touch it is if I lost my job, and couldn’t find a part-time job to keep me afloat. In fact, the only two times I’ve ever had to use my emergency fund is my two stints of unemployment.
My feeling is that as long as I am able bodied and can find more work, sell items I no longer need, or go without whatever it is I need to replace, it’s not a true emergency to me. And I think the key is to decide early on what you are going to use your emergency for – and stick to those rules.
When would you use your emergency fund?
Author: Krystal Yee
I’m a personal finance blogger and marketing professional based in Vancouver. I’m a former Toronto Star (Moneyville) columnist, author of The Beginner’s Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I’m not working, you can usually find me running, climbing, playing field hockey, or plotting my next adventure.