Living without an emergency fund is like driving a car on low fuel. Sooner or later, you’ll find out the hard way!
Yet, most Americans don’t have any emergency funds. The reason why this is the case is a story for another day, but if you’re in this group, what will happen if your car breaks down today or worse, you fall ill and don’t have health insurance?
If you have an emergency fund, thumbs up! That’s a financially prudent move, but do you have the discipline not to touch it when you’re short on cash? Knowing how to use your emergency cash can make a big difference in your financial journey.
Read on to learn how not to misuse the money you’ve put away for a rainy day.
Use the Savings Only When an Emergency Strikes
You’ll be tempted to dip into your emergency kitty on several occasions. Being low on cash before payday will test your discipline, but you may also want to use the cash to pay off some debt, pay for a necessary (but not emergency) expense like fixing a plumbing issue, or even invest.
However, none of these reasons call for undoing the hard work you’ve put into building the fund. You should only use your emergency funds only when there’s an emergency.
A good example is when you lose your job and need to pay rent until you get another one. Or when your commuter car breaks down and you absolutely need to fix it or commuting to work will be a problem.
When that emergency strikes, it’s not time to go all in and use the cash without a care. If you only need $500 to settle the bill, don’t withdraw $600, treating the extra $100 as a “convenience charge.” If you’re not careful, you could deplete your savings after a few emergencies.
In other words, treat your emergency fund like a retirement fund like 401(k) or IRA. Withdrawing from 401K or IRA without penalty is difficult, and in most cases, you’ll regret doing it.
Maintain a Regular Savings Fund
Refraining from using your emergency cash unnecessarily takes great discipline, but even the most disciplined people can fall short if they have no other choice.
Let’s face it: you’ve run out of money a week before day. How are you going to feed yourself?
You might get by with water and the leftovers in your kitchen for a day or two, but when the hunger starts biting, you’ll have no choice but to turn to your emergency fund. After all, isn’t starving a critical emergency?
To prevent yourself from using your emergency savings, it helps to maintain a regular savings fund. This is the fund that you tap into when the money runs out before payday.
Do NOT Touch Your Emergency Funds! OK, you can touch it, but only when you’re in an unexpected situation and the expense is urgent and absolutely necessary. You’ve done a great job saving emergency funds and you don’t want to undo your hard work at the slightest chance.