I often have informative questions when I am teaching financial awareness to the community. Here is a question I wanted to share.
Question: I am establishing an emergency fund but what reasons would I need to tap into this savings account?
Answer: Having an emergency fund is strictly for emergencies and you can decide what constitutes an emergency.
Make a list of what you feel is considered an emergency and ONLY use the money for those reasons. At this point, discipline will need to be implemented.
What is not considered an emergency:
· Money to eat out and go out on the town
· Compulsive shopping spree
· Personal Property Taxes
· Car maintenance
Have a separate savings account for the expenses above and set aside a certain amount of money each paycheck. You know those expenses are going to occur every year. It is no surprise and therefore not an emergency. It is very important that we budget for car maintenance, birthdays, recreation, vacation, home maintenance and so on. These should not be considered emergencies and need to be put in our budget monthly. This is something that a lot of budgets lack.
You have spent years depositing your hard earned money into your emergency fund, what would be your rock bottom to consider tapping into it?
· Job loss
· Major medical expense
· Large unexpected expense
· Loss of spouse or another family member
An emergency such as job loss is not expected and could cause immediate financial hardship. Using your emergency fund at this point would be necessary.
If you are at the point of losing your home or facing garnishment would be another reason to use your emergency fund.
Determine your reasons and discipline yourself. Knowing you have a backup plan will bring down your stress level.
Here is an emergency fund calculator: http://bit.ly/1bfhN8c
Written by Beth Mincks, Financial Education Specialist