When to use your emergency fund is one of the most critical decisions of your lifetime. It takes longer to save money for contingencies, and building such funds takes work. Therefore, you must be careful and know where and when to spend your emergency fund.
Here are ten situations when you can consider using your emergency corpus.
Job loss or reduced income
If you lose your job or experience a significant decrease in income, you may need to rely on your emergency fund to cover your expenses until you can secure new employment. Having at least six to 12 months of funds is vital to cover your essential expenses. The next step is to find another job quickly so you don’t get into more trouble.
If you or a family member has an unexpected medical emergency, your emergency fund can help cover the associated expenses not covered by insurance.
If your car breaks down, you may need to use your emergency fund to pay for repairs or to purchase a new vehicle. You may make use of your car insurance but in case the damage is such that your insurance amount is falling short, you can always make use of your emergency fund but make sure to put that money back in your emergency account.
Also Read: Step-up and Step-down Home Loans: Should you opt for variable EMIs?
If you experience a home-related emergency, such as a broken furnace, leaking roof, or burst pipe, your emergency fund can help cover the costs of repairs. Often people take short-term loans for such expenses but if your emergency fund is enough you don’t need to borrow money.
If you need to make an unexpected trip, such as for a family emergency, you may need to use your emergency fund to cover the associated costs.
If you find yourself in a legal dispute or are facing unexpected legal fees, your emergency fund can help cover these expenses.
If you have an unexpected bill, it can quickly add to your expenses. Your emergency fund can help cover these expenses.
Home insurance deductible
If you need to file a claim on your home insurance policy, you may need to pay a deductible. Your emergency fund can help cover this expense.
Loss of rental income
If you are a landlord and experience a loss of rental income due to a tenant not paying rent, your emergency fund can help cover your expenses until you can find a new tenant.
Life is unpredictable, and unexpected expenses can come up at any time. Your emergency fund can help cover these expenses, such as a family member’s wedding or unexpected taxes owed.
Adhil Shetty, CEO, Bankbazaar.com, says, “During a financial emergency, your budget is going to be tight. Therefore, you must use your fund wisely and not spend this money on lifestyle choices such as eating out, vacations, clothes, electronics, etc. You can build your emergency fund using liquid instruments such as recurring deposits, fixed deposits, liquid mutual funds, and high-interest savings bank accounts. It helps keep your money locked in and grows on its own through interest generation.”
It is easy to spend your emergency funds but challenging to build it again. You must carefully spend this money to avoid facing financial difficulties when a real emergency strikes you. Your funds must be used to handle situations when you have no other source of earnings left.