The answer to this question might seem obvious. You should use emergency funds during emergencies, right? Well it is not always that simple in everyday life. And it gets even more complicated in the midst of an unprecedented and particularly daunting economic crisis.
In order to adequately answer this question you must first define what constitutes a financial emergency in your life. Then, you should exhaust all other means of resolving the financial emergency. Finally, you need to decide how much of your stash you should use toward the emergency.
Here are a few tips to help you make the right decision.
What is a Financial Emergency?
When you first establish your emergency fund you need to outline specific situations that you deem to be emergencies. Every financial hiccup is not an emergency and should not be viewed as such. Financial emergencies should generally be viewed as situations that substantially and adversely impact your physiological well-being.
In other words, does the circumstance adversely impact your ability to provide food, shelter, and clothing for yourself and/or others. While our other needs are definitely important they generally don’t provide a basis for utilizing emergency funds.
Even within the context of your physiological well-being an emergency generally involves situations that impede your ability to provide the basics – not luxuries. For instance, if you don’t have enough money to feed your family regular, home-cooked meals it may be time to dip into your emergency funds.
Going without basic nourishment definitely impacts our ability to function properly at every level. It is therefore a justifiable emergency. However, if you can’t afford to eat at your favorite restaurant this is generally not considered a financial emergency. As such, you should continue to save and find creative ways to enjoy restaurant-style meals at home.
Every bona fide situation that impacts your physiological well-being doesn’t necessarily require accessing emergency funds. Sometimes it can be solved through alternative methods, which can allow you to extend the life of your emergency funds for when you truly need them.
For instance if you are having issues paying your rent or mortgage, downsizing may be a viable option. If you still have the means to afford housing it may be better to look for more affordable housing. So instead of paying for a $2000 mortgage or rent payment, you may be able to find suitable housing for half the price.
Not only will you save on housing, you will also extend the life of your emergency fund reserves. If you have to spend your emergency funds on a high mortgage or rent payment for several months, your emergency funds will become depleted much faster.
If you find more affordable housing, you may not need to use your emergency funds at all. But if you do, it will be less taxing on you in the long run. You could potentially extend your emergency funds twice as long in such a situation.
Of course, there are also other solutions in this scenario. You many consider moving in with family or friends, applying for governmental subsidies, getting payment extensions from your landlord, etc. The key in this and other financial emergencies is to exhaust all options before using emergency funds. Your ultimate goal should be to maintain your emergency funds for a truly rainy day.
How to Use Emergency Funds
You should see a theme developing my now. The idea of using emergency funds is to keep as much money on reserve as possible. So the goal is to spend the least amount of money that is necessary to cover an emergency situation.
For this area I will use the final physiological need – clothing. In modern, western society clothing is rarely considered an emergency need on a day-to-day basis.
However, situations such as fires, theft, natural disasters, etc. sometimes result in people losing all of their possessions. In such instances, they usually have to replace their clothing. This definitely constitutes an emergency.
As stated earlier, you should first exhaust all other means before dipping into your emergency funds though. In such scenarios, there may be clothing available through donation-based organizations or from family and friends. So the first option should be to use alternative sources so that your emergency funds can be used for the most important expenditures.
However, if you need to use your emergency funds for clothing you should be conservation with your spending. Start with the basics. You don’t need a wardrobe full of designer apparel to get back on your feet. It is fairly easy to get away with buying 1-2 weeks worth of clothing until you get settled again.
You can generally get quality, affordable items through thrift, second-hand, or discount department stores. Such items are usually suitable for your immediate needs. It is definitely not necessary to use all of your resources on clothing.
Instead you should keep as much as possible to cover your other physiological needs. In this way you can and should use your emergency funds to keep yourself afloat.