One word: awe.
That’s all you feel as you gaze upon its magnificent brilliance.
Every single neuron in your brain is joining in the resounding chorus of yes! Do it! Think of how great movie night would be. Imagine how much the guys would love coming over for Sunday Night Football. Who wouldn’t want a 75 inch Sony LED high definition TV?
Better yet… you can afford it.
There are $3,000 sitting in your bank account.
So. What do you do?
That’s what today is for. Today, we’re going to get real. We spent the last 2 weeks talking about emergency funds – why you need one, where to put it, and how much to put in it – so in the series finale, we’re going to talk about when you can tap into the reservoir you’ve built.
When Can I Spend my Emergency Fund?
Discipline. Discipline is the key to maintaining an emergency fund.
If you followed the steps I presented in parts 1 through 3 of this series, you now know why you need an emergency fund, where to keep it, and how much to put in it. Over the course of a couple years, you and your family can save enough to protect yourselves financially in the event of a major unexpected expense or a prolonged period of unemployment.
If you follow my advice from part 3 and stash away enough money to cover 3 to 6 months of your cost of living, you could easily have 20 or 30 thousand dollars sitting in a bank account. Accumulating that kind of a safety net can take a long time, but you can throw it all away in 24 hours. Because of this, I’ll answer 2 questions.
#1: What can you spend your emergency fund on?
#2: Acknowledging the fact that we are all humans here, what are some practical ways to help ensure you don’t spend your safety net on something irresponsible?
What can you spend your emergency fund on?
Remember how I said you can split up the saving process into 2 halves? 1 is $2,000 plus an additional 1k for each other member of your family to cover major expenses, and the second is enough to cover 3 to 6 months of expenditures during unemployment. Well, you can manage your usage of this fund in the same way.
As long as you are still employed, you should only tap into your emergency fund for, well… emergencies (I know: this is freaking rocket science). This includes anything major that you did not budget for.
Oil changes, tire swaps, and minor vehicle maintenance should all be covered by a transportation category in your budget. Those types of costs are expected to occur from time to time, and they won’t break the bank. Additionally, if your current method of transportation is getting old, and you expect to buy a new car in the next couple of years, you should be saving up for the eventual purchase in a separate category.
But, let’s say the engine in your ’06 Tacoma stops working, and your deductible is $2,000. This would be a good time to use your emergency fund to cover an expense. Why? It’s probably more than you budget for on expected vehicle maintenance, and it’s much cheaper to pay the deductible and get your truck fixed than it would be to spend $30 on Uber every day to get to work.
Let’s look at medical expenses. Your regular dental checkups and doctor’s office visits should be included in your budget. Those are expected costs. However, if little Gregory breaks his arm in a pee-wee football game or Susie goes to the hospital for a few days with appendicitis, tapping into your emergency fund to cover the bill is a perfect use of those savings.
Other examples of things you should use your emergency fund for are unexpected trips due to family emergencies or major home issues like repairing a leaking roof after hail damage. Basically, if something costs more than a couple hundred dollars, and it isn’t an expense that you should include in your regular budget, use your emergency fund.
If you are single, then the specific implementation of your emergency fund is up to you. However, if you are married, you and your spouse should probably sit down and discuss what you want to include in your budget vs. what you want to cover with your emergency fund. Don’t use it to pay for a family vacation to Hawaii, a new TV, or a wild New Year’s Eve party. But, beyond the obvious black and white, there is a lot of gray area in terms of deciding when to tap into your emergency fund. Look at your specific situation and decide what is best for you and your loved ones.
If you lose your job, the entire function of your emergency fund transforms. Instead of saving the money for major unexpected purchases, you will be forced to depend on it to cover your entire budget. Even though you will heavily tap into your safety net, I still recommend some restrictions to implement while living off of your emergency fund and searching for new employment.
- Vastly reduce your entertainment budget: this is not the time to check out the next blockbuster at Cinemark or fulfill your dream of red sox tickets at Fenway. You want your emergency fund to last as long as possible in case your job hunt drags on for several months.
- Don’t make any new purchases: this one should be pretty obvious, but if you aren’t receiving a paycheck, you shouldn’t be buying a new TV, repainting your bedroom, or hunting for a new car. You will encounter several different seasons in life, and this is one of those times where frugality is key.
- Re-evaluate subscriptions and unnecessary expenses: to help extend the life of your emergency fund, temporarily disable things like Netflix, cable TV, magazines, and gym memberships as long as they don’t include hefty cancellation fees. Additionally, you might be able to reduce your cellular data plan. Make sure you limit your visits to restaurants as this can be a huge drain on your budget.
As long as you followed my advice from parts 1 through 3 of this series and you watch your spending, your emergency fund should last for several months, giving you plenty of time to find a new job.
How do you avoid spending your safety net on something irresponsible?
So, now that we’ve covered what you should spend your emergency fund on, let’s talk about some ways to make it easier to stick with that plan.
- Place your fund in a separate bank account. Don’t just accumulate a baseline on your regular checking or savings account that is equal to what you would have put in your emergency fund. The more distinct the separation, the less likely you will be to access the money when you shouldn’t. To reduce the temptation to blow your safety net on something like a new TV, leave the associated debit card at home so that you can’t access it when you go shopping.
- Include a flexible spending category in your budget to provide a cushion at the end of the pay period. Spending needs will fluctuate from month to month, so you might run out of cash in the grocery fund one month, transportation in another, and entertainment in a third. Setting aside a flex spending cushion allows you to smooth out those variations so that you won’t be tempted to tap into your emergency fund at the end of each pay period.
- Factor occasional repairs into your housing and transportation budgets. If, over the long term, you anticipate $600 per year in vehicle maintenance costs, put $50 every month into your transportation allotment. That money will continue to accumulate until an irregular trip to the mechanic takes place. Most months, you won’t need the extra money, but it will be available when something does come up, and then you won’t have to tap into your emergency fund for small repairs.
- Ease the temptation to buy that flat screen TV or dirt bike with your safety net by setting up a separate savings account for it. If you set aside a portion of your paycheck every month into this category, you can enjoy the flexibility to make a guilt-free purchase when you find that cool new toy.
- Protect your emergency fund from impulse decisions by remembering why you created it in the first place. You want to ensure that you and your family will be prepared when an unforeseen event does occur or when you lose your source of income. You set the money aside so that you can sleep soundly at night, knowing you’re prepared for the unknown.
Like I said already, discipline is the key to maintaining an emergency fund. If you’ve reached this point, then you should be extremely proud of the work you’ve already put in. An emergency fund is a pillar of personal finance. Once you have tackled this and created security for the future, you can move on to preparing for your kids’ college or investing for retirement.
This wraps up my series on emergency funds. I’ve really enjoyed writing on this topic, and it’s been a great opportunity to refine my thought process on the subject. I hope you have been encouraged to save part of your paycheck each month and set it aside to protect you and your family’s financial future. If this post or any of the previous installations in the series have helped you, please share them on social media using the buttons below to help out your friends and colleagues as well!