When should you tap into your emergency savings?
Saving money for unexpected expenses so important! A rainy day fund can not only keep you covered should your car break down or if you are saddled with a medical expense, but it can also protect you from having to drain your hard-earned savings or max out your credit cards.
But having an emergency savings fund and knowing when to use it are two different things. When it comes down to it, what expenses qualify as an emergency?
Knowing when to tap into your funds and when to look for other financial options is a great way to discipline your spending and keep your rainy day fund intact.
1. What is an emergency expense? We all have expenses that come up that may stretch our budgets thin. This can range from a bill you forgot to pay that has now incurred fees to a higher than usual credit card balance, but sudden costs don’t always translate into an emergency. For example, if your car breaks down and covering repair costs would only force you to cut back on your spending or pick up a few extra shifts at work, you will be better off making a few sacrifices than draining your rainy day fund. To avoid the temptation to dip into your savings, it’s helpful to think of true emergencies as those that cannot be covered out-of-pocket or by sacrificing discretionary purchases.
2. Get creative about covering costs. Rather than turning to your emergency savings every time a cost comes up, determine other ways to cover the expense first. For example, is a repayment plan available? Will working overtime or taking on freelance work allow you to cover the costs? Even though your emergency savings is there to help you, it should always be a last resort.
3. Curb the temptation to spend. When your budget is stretched thin and you’re struggling to stay afloat, it can be tempting to dip into your emergency fund to cover day-to-day living costs or small luxuries, but even small expenses add up and you may find yourself depleting your rainy day fund and facing a financial shortfall when a real emergency hits. So separate your rainy day fund from your regular savings and don’t touch it.
If you find yourself falling behind on bills or your daily needs, look to your budget and re-evaluate your spending. We have a free Budgeting Made Easy booklet that can help you plan for those unexpected emergencies!