An emergency fund is an essential financial safety net that everyone should have in a savings account. If you’re just starting to build one for yourself, you should learn these three emergency fund rules.
1. Only Use It For Emergencies
Your emergency fund is for emergency expenses only. What defines an emergency expense?
One necessary quality of an emergency expense is urgency. You can’t wait for weeks to save up money to manage the expense — you need to pay for it immediately. Time is of the essence.
Another quality that defines an emergency expense is surprise. The expense was unpredictable. If the expense is expected or scheduled, then it’s not necessarily an emergency. Your annual trip to the mechanic to give your car a tune-up is not a surprise. This is an expense that you can easily plan and save up for. On the other hand, paying for roadside assistance after your car gets a flat tire on a strip of highway is an emergency.
Why is this a crucial rule? When you withdraw savings from your emergency fund for non-emergencies, you’re sabotaging your future self. You’re leaving yourself with a smaller safety net for actual emergencies. You might deplete the savings so much that you won’t have enough left to cover an urgent and surprising expense.
2. Replenish It
Once you’ve withdrawn savings from your emergency fund, you should do your best to replenish that amount as soon as possible.
You never know when another emergency expense will show up and when you’ll need to depend on the fund again. You don’t want to leave yourself with a smaller safety net for too long — or worse, you don’t want to leave yourself with an empty account. If you make this mistake, you won’t have enough savings to handle an urgent expense.
What can you do when you don’t have enough savings? Don’t panic. You can turn to alternative payment methods to cover an urgent expense, even when your emergency fund is empty. As long as your balance is far from the credit limit, you could use your credit card to cover the expense and then pay down the balance later on. Or you could apply for a loan to resolve the problem.
You don’t have to book an appointment at your local bank branch to apply for a loan. You can apply for a loan over the phone as long as you meet all of the qualifications. If you’re approved for the loan, you can use borrowed funds to manage the expense and then follow a repayment plan afterward.
3. Save Up For Big Emergencies
Your emergency fund isn’t just for small home repairs and mishaps. It’s also meant to be a safety net for times of major upheaval, like when you unexpectedly lose your job or you need to cut your hours to take care of an elderly relative. With enough savings in your fund, you can supplement your loss of income so that you can temporarily maintain your financial stability in an unstable time.
How can you do this? Follow the basic rule of thumb of saving three to six months’ worth of your income in your emergency fund. With this amount of savings sitting in your bank account, you can stay afloat for several months when you don’t have access to your regular income. You can still pay your bills, buy your groceries and cover all of your other essential expenses.
This rule of thumb will help you avoid serious financial trouble, like defaulting on your mortgage payments or running out of money for groceries. It will also give you time and space to recover.
For instance, if you lose your job, you will have time to apply for unemployment benefits, send out job applications and take on interviews. You won’t feel as much pressure to take a job offer that you don’t really want just because you need a paycheck. You can afford to be more selective.
Don’t ignore these crucial rules. They can help you get through emergencies unscathed.