3 Questions to Ask in a Spending Crisis

94 Stainless Steel Smart Money Clip Credit Car...
Image by ExecGifts via Flickr

Having a well-funded emergency fund is one of the foundation blocks for almost every saving or debt-repayment plan.   The theory is that you’ll be better able to weather a financial storm if you don’t have to raid your budget or beat on your credit card every time an unexpected expense rears its ugly head.   The number varies based on your pundit and your stage of life, but generally ranges from $1000 to 8 months of your expenses.  The money needs to go in a liquid account, so it can be accessed when necessary, but it needs to be completely ignored otherwise.  What good is an emergency fund that has been spent?

Now that you have your emergency fund, you are set, right?  But what happens when something comes up?  When is it okay to spend that money?  Emergencies can take so many forms: medical emergencies, car repairs, accidents, a good sale.  Wait.  What was the last one? What actually constitutes an emergency that is worth shredding your security blanket?

Here are three questions to ask yourself before you spend that money:

  1. Is the expense necessary? If it’s a voluntary expense, you should create a savings goal and wait to buy it until you can actually afford it.    Emergency funds are meant for emergencies, not whims.  A good sale is never an emergency.
  2. Is it important? When my motorcycle breaks down, it gets parked until I can afford to pay for the repairs.  When my car breaks down, I need to get it fixed so I can get the kids to daycare and myself to work.
  3. Is it urgent? Is this an expense that can be postponed until next month, when you have a chance to sell something you don’t need, or rearrange some items in your budget to “find” the necessary cash?  If it doesn’t need to be paid right now, it may be best to put it off.  In the case of medical bills, you can usually get on a payment plan with no penalties, if you ask.   That can change an expensive obligation to a manageable monthly bill.

Your emergency fund should only be used on things that are important, necessary, and urgent.  Anything else should get postponed until you can afford to pay it using your on-budget expense items.     As the wise man once said: “Lack of planning does not constitute an emergency.”  Of course, if you are in a financially stable situation and willing to take a small risk for a short time, eliminating an entire debt item to save the interest can be the right decision.

What would you be willing to spend your emergency fund on?

Enhanced by Zemanta
Share the Love
Get Free Updates

  • 3 comments

    Comments

    1. I completely agree an emergency fund is to only be used in a true emergency. How much is really necessary to have in your emergency fund? I wrote a post about how much do we really need in our emergency fund, http://www.theleantimes.com/?p=1622. It is a tricky question because if we have too much we are losing out on paying off debt and if we don’t have enough we risk going back into debt. Great Post.

    2. We just used almost all of our emergency fund to pay off the rest of our car loan, but we fall into that last category you mentioned, “a financially stable situation and willing to take a small risk for a short time”.

      We have super stable jobs and should be back to $10,000 in the bank no later than March 2011…probably by December 2010 since I hate not having my normal security blanket. We only keep 3 months of expenses ($10,000) because we would only need to touch it at all if we both lose our jobs. Otherwise, we can live off of one income if necessary (hopefully not my income or we’d have to give up all fun stuff, but at least it’s possible). Plus, we do have another $30,000 easily accessible via stocks and a Roth IRA and another $20,000-$30,000 in home equity…

      In short, I agree that an emergency fund shouldn’t be used for anything other than an urgent emergency bill unless your income is pretty much guaranteed and you have padding elsewhere in case the unimagineable happens.

    3. I definitely had an issue tapping into my emergency fund on a regular basis. I always seemed to “need” the money.

      What I decided was the money was too liquid. We did 2 things. We put them in savings bonds (so that you couldn’t cash right away) and we only invested a small portion of our paycheck, so we wouldn’t miss the money. It took a few years to build up a big enough buffer, but thankfully we haven’t had to touch it. The last benefit to this approach is it can double as part of the kid’s college fund if we are fortunate enough to not need it for the next 12 years.

      We have a backup buffer now that’s like 2 months expenses, but I don’t feel as bad when I go blow it on a house project and then rebuild again.

    Speak Your Mind

    *