Have you ever had a situation where something really bad happened and you didn’t have the money to pay for it? Maybe your car broke down, your washing machine broke or you had an accident or health problem that resulted in some unexpected medical bills?
I recently wrote a post about saving for an emergency fund to cover situations like these. It provided a simple, and fun, way to save around $1400 over the course of a year.
In that post I admitted that I used to have an emergency fund until about two weeks ago and, well, Murphy’s Law kicked me squarely in the nuts this week.
This week my washing machine has broken.
Last week my car required a service due to dying spark plugs and an engine that was starting to sound like a small tractor.
To top it all off I also had some unexpected legal expenses that required me to dip into my food budget.
All in all I hit a total facepalm moment for sure last week.
If ever there’s a time I’m going to tell you NOT to use your emergency fund for anything BUT an emergency, it’s now.
Now, I wasn’t a complete plank when I put my emergency money “to use”. In a round about way it was put to good use. I used it to pay down a credit card that was kicking me for 20% of interest per annum. I justified the expenditure as a good decision because it would save me on some interest payments next month.
I did admit in the article, that the justification to myself was not really a good enough reason, and don’t I know it now!
However, it wasn’t necessarily a bad decision either. It was put toward paying down debt, which is sensible compared to being a goon and blowing it on buying a kitten.
Yeah, that was the first think to spring to my mind. I couldn’t think of anything else without thinking about it.
A reminder: What your emergency fund is for
Your emergency fund should be for unexpected costs that would normally blow a whole in the side of your budget. You know, that family budget I told you to set up a few weeks back.
That IS still a good idea by the way!
So what becomes the deciding factor prior to digging into your emergency fund?
There are three questions you should ask yourself:
1. Is it an unexpected cost?
Life has expected and unexpected costs.
Your family budget outlines the weekly, fortnightly or monthly costs that are very much expected. These are things like food, insurance, electricity, clothing and the like. There are other expected costs such as back to school expenses, Christmas and birthday presents which are annual additional costs but are expected nonetheless. Having your car serviced may be a twice yearly cost for you. You get the idea, right?
Really, all these expected costs should be factored into your budget.
Then there are the truly unexpected costs.
The curve-balls that life throws at you.
Like my car that became ill and my f*****g washing machine that I’m not talking to very nicely at the moment. Or maybe you lost your job (oh God, don’t do that to me right now!).
If your expense falls into the latter category and you didn’t see it coming then you’ve ticked off the first question and you can move swiftly onto question two.
If not, keep your hands out of that jar!
2. Is it a necessary cost?
This is where your self control needs to kick in.
Needs and wants are two very different things and you need to figure out whether this expense is something that you really need.
If your car breaks down and you need that car to get to work then you clearly need to get it fixed. I pondered getting public transport but I save more going to work by car than I would in bus and train costs (not to mention the time I save).
If you have tooth ache and find you need some work done which will cost you, then you need to cover the expense to get yourself out of pain and back to happy again.
However, if you find yourself just needing to buy yourself some new shoes because you feel a bit down. You know, that retail therapy thing that normally kills people’s pockets. Or, you want a massage because you feel a little bit icky and achy, these aren’t things that are essential.
If you ever feel that these things are bordering on a need then you should be dipping into savings for these types of expense, not your emergency fund.
3. Is it urgent?
When a true emergency strikes the last thing you want to worry about it where you’re going to get the money from to pay for it.
If you’re sat in the dentist chair in agony and you’re being told it’s going to cost you a relatively small fortune then your emergency fund is there to remove the immediate stress from the situation.
A non urgent situation would be your favourite store having a big sale. Again, these are expense for you to take from your savings account, and you should really consider asking yourself if this is a necessary expense before you do that.
Use your emergency fund wisely!
I misused my emergency fund a few weeks back because I saw it sitting there doing nothing and considered I could put it to good use to save me $20-$30 a month on interest and to help me achieve my goals of paying down my credit card more quickly.
What I realise now is that your emergency fund SHOULD be sitting there doing almost nothing. You could place it into an easily accessible savings account, although I still recommend having some cash at home.
You see, your emergency fund is an insurance policy of sorts, for the unpredictable things that happen.
It’s there to reduce the stress and inconvenience of an unexpected situation.
So if you find yourself in a situation where you feel like using your emergency fund, ask yourself these three questions and if you find you can answer yes to all three of them then give yourself permission to use it.
Just make sure you replenish it as soon as you get back on your feet because you never know when Murphy will strike again!
Have you any ever had any unexpected costs that have blown a hole in your pocket that you couldn’t afford? How did you handle it? Please share your story in the comments below.
Also, if you want to know more about the benefits of saving for an emergency fund and how to do that over the course of a year, I encourage you to read this post.