In the last post about when the “stuff” of life happens, the scenario was posed where two different families had an unplanned event (an emergency) happen to them and how having an emergency fund (even a small one) can buffer you and your family from financial stress. One family had a small emergency fund set aside for just such an occasion and the other one did not. The family with the fund was able to pay for the emergency and move on with no added stress in their life, but the other family heaped on more stress to their life due to the event.
So, let’s back up for just a quick minute and discuss what an emergency fund is. To do this, I like to first look at a definition of an emergency from the dictionary. Merriam-Webster defines an emergency as 1) an unforeseen combination of circumstances or the resulting state that calls for immediate action 2) an urgent need for assistance or relief. I pick up on the key points of “unforeseen” and “immediate action”. So an emergency fund is just a fund of money set aside to cover those unforeseen events that require immediate action.
For the rest of our discussion in this post, let’s be positive and assume you have set aside some money for emergencies. Yay, high five! Some of the occasions to use it will seem obvious, but I think just as import is to discuss when NOT to use an emergency fund. It is tempting to want to use any money you have saved for an occasion you think is really important, even if it is not truly an emergency. Here are a few ways to check yourself.
If an emergency is truly unexpected, then you have no idea that it is coming. And if you have gone to the effort to save money in your emergency fund, you shouldn’t be using the money for an event or occasion that you really should have planned for, even if you feel it’s really really important to do. You got into a car accident and need medical attention; that was definitely unplanned and you may need funds to cover it quickly. You’re refrigerator stops working and you need to get a different one; this is also unforeseen and would require some quick attention to be able to keep food safe for your family.
How about this example? You forget your wife’s birthday and the day before you realize you didn’t get her a gift. You have no free cash and really feel like you need to get her a gift and want to use the money in your emergency fund to pay for it. You rationalize that if you don’t get her a nice gift, she might be really upset. Verdict: While celebrations are great and you may feel like you will get in a lot of trouble if you don’t get your wife a gift, it was an expected event. Her birthday comes along the same day every year. Poor planning or forgetfulness doesn’t constitute an emergency. This would not be a good use of your emergency fund.
Requires Immediate Action
When you need to act fast, time is of the essence. If you don’t act, something even worse could likely happen. Your adrenaline may be pumping and you need to get the situation taken care fast. Medical related emergencies are typically the ones that first come to my mind for this. When someone is unconscious or bleeding uncontrollably, there is no time to wait and it definitely requires immediate action and immediate funds to cover an ER visit.
But are there times when it really isn’t absolutely necessary to pay for an item or service immediately? See what you think of this scenario. Your car is really old and should be replaced soon. You find out that a neighbor is listing their car for sale tomorrow and it is in great shape and at a great price. They will sell it to you now before it goes on sale to the general public, but it has to be today or it will be sold quickly to someone else. Verdict: Transportation is important, but your car does still work and you don’t have the money saved except for the money sitting in your emergency fund. While you may think immediate action is required, it really just means you may have to wait a bit longer to save and purchase a different used car.
Avoiding the Temptation
If you haven’t already been able to tell, it is very tempting to want to spend the money you have saved in an emergency fund for things that you want or that would be a great deal. But are they truly an emergency? I admit, it is hard to see that emergency fund just sitting in an account doing nothing. But quite frankly that is exactly what it is there for. When you absolutely need it, you will be absolutely glad it is there.
How to Build an Emergency Fund
So if you’ve seen the merit of an emergency fund and now know when to use it and when not to use it. Maybe you’re issue is that you still don’t know how to save and build one. A great way to build up your emergency fund is to do it in stages. What we’ve been talking about in the last two posts is primarily what I would refer to as the starter emergency fund. This would be about $1000 and could cover some of the more common or smaller emergencies. Eventually your goal should be to build it up to be able to cover 3-6 months of your expenses should you lose your job or be unable to work. A great way to do this is by reducing expenses in a certain category each month. A small sacrifice like doing without that coffee you buy on the way to work or eating out for lunch or dinner will help to get that account funded.
The quickest way to jump start your emergency fund is to sell something. Maybe you have a motorcycle or bicycle that you just don’t ride anymore or some sporting equipment that you just don’t use or need anymore. Get creative and look around in your closets, attics, garages, or basements. You’re bound to have some clothing, shoes, collectibles and other items of value in your house that you could sell online or at a garage sale.
Another way to get the emergency fund going is to bring in more income. It’s not easy to march in and ask for a raise any time you want, but you may be able to find a night, weekend or part-time job or seasonal employment. Are these easy to do? No. But no sacrifice is easy. Will you be a little tired from the extra work? Sure. But in the end, what you’re trying to do is provide security and safety for you and your family. Once you have some security net set up (emergency fund), I promise you will sleep much better and with less stress.
If you would like help taking control of the financial aspects of your life, please consider Aspelin Financial Coaching to help you be victorious with your money! Servicing clients in all 50 states via in-person meetings, video calls or phone consultations.