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Answer these 4 Simple Questions Before You Blow Out Your Emergency Fund

Tue, Aug. 08, 2017 Posted: 05:35 AM


An emergency savings fund is smart financial tool that can keep you out of debt, help you sort out emergencies, and reduce your financial worries. If you have an emergency savings funds, you are definitely on a higher rung of the financial ladder than people who live from paycheck to paycheck. However, having an emergency savings fund is only half the battle, the real problem is knowing how to identify expenses that qualify as a true emergency.

For instance, someone might consider an impromptu party an emergency that warrants taking money out of the fund to buy a new dress. To another person, a sudden breakdown in the washing machine is an emergency that warrants taking money to buy a new washing machine, dryer, and dishwasher. Unfortunately, if you don't identify real emergencies, you'll blow out your emergency fund on quasi-emergencies and you'll be left cash-stranded when a real emergency emerges. This piece provides four question you should answer before you take money out of your emergency savings fund.

1. Ask yourself if the expense qualifies as a true emergency

The first way to avoid blowing your emergency savings on quasi-emergencies is to be honest with yourself in identifying true emergencies. True emergencies include medical expenses, unexpected car repair, sudden need to repair/replace home systems, and other unpaid expenses that could subject you to emotional stress.
True financial emergencies are issues that when left unattended could have adverse effect on you and your family. Richard Banks, an analyst at Weiss Finance observes that," there's no rule of the thumb for identifying true emergencies – you'll need to be objective when faced with an expense before you determine if you should take money out of emergency savings fund."

2. Ask if you could have budgeted for the expense

Many people are always one bill away from debt or being broke because they are stuck in the vicious circle of saving up money up for emergencies only to blow up the money on quasi-emergencies. You'll always be stranded in the event of true emergencies if you always take money out of your emergency savings fund to sort out annual expenses such as property taxes, insurance and registrations.
You should remember to budget for annual expenses and regular expenses such as general auto servicing, tire replacements, and membership fees. Including such items in your budget from the beginning will eliminate the need to dip hands into your emergency savings unnecessarily.

3. Ask if proactive maintenance have prevented the expense

You can prevent some 'emergency expenses' by developing a culture of proactive maintenance. Doing proactive maintenance on your home and your cars could prevent the sudden breakdowns – the only potential breakdowns are accidents, which would be covered by your emergency fund. Proactive maintenance of your HVAC system, plumbing, and vehicles doesn’t necessarily mean that they won't break down but you can be sure that you'll spend less on preventive maintenance than you'll spend if the systems actually break down.

4. Ask if you can avoid or hold off the expense until you can save up to cover the cost

When things break down suddenly, it is normal to get into a hyperactive state where you whip out your credit card to effect a speedy replacement. Of course, the replacement of some things are no-brainers—heating in winter and AC during summer are good examples.

However, in most cases, a simple repair process can get the broken appliance back to working order and a repair should ideally not cost as much money as a replacement. If repairing the broken system is not an option, you may want to consider holding off the purchase for a couple of weeks/months until you can actually save up money to fund the expense without dipping hands into your emergency savings fund.

Mark John