Dear Dave,
My husband and I just completed Baby Step 3, and we have six months of expenses saved for an emergency fund. How should we determine when something is actually an emergency?
Riley
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Dear Riley,
Congratulations on doing the work, being disciplined, and saving like crazy! Now you’ve got peace of mind, and a pile of cash, that will help turn an emergency into nothing more than an inconvenience.
There’s no shame in using your emergency fund if you really need to. That’s what it’s there for. Just remember to ask yourself a few questions anytime something pops up to make sure you’ve got a real reason to use it.
Is the expense really unexpected? Christmas happens on December 25th every single year. You know your semi-annual car insurance payment is coming, too. Make sure things like this are part of your regular, monthly budgets. Some examples of unexpected expenses might be a job loss or pay cut. Emergency medical expenses and car accident repairs might fall into this category, as well.
Is it absolutely necessary? Most people say they know the difference between a want and a need, but that’s not always the case. Replacing your only mode of transportation would be a need. Upgrading to a newer, fancier car is not. If your car goes down for the count, you need transportation. Use your emergency fund to buy something affordable and reliable you can pay cash for. But don’t dip into it just to upgrade your decent car for one with a million bells and whistles.
Is it urgent? Practice the art of patience whenever possible. If your home’s air conditioning unit goes out in the middle of summer, that’s probably an urgent fix. But hearing about the “sale of the century” at your favorite retail store? Grabbing the newest, hottest cell phone when yours works just fine? Nope!
Your emergency fund is all about long-term security, not instant gratification. Don’t blow it impulsively, but don’t be afraid to use it when it’s really needed. Be wise, and ask those three questions. Check yourself so you don’t wreck yourself—or your budget!
—Dave
