One of the most common pieces of money advice is to have have an emergency fund (e-fund, for short.) But no one ever talks about what IS an emergency. As in, what real events would actually trigger you feeling OK to use your savings? Yeah, I know we aren't going to feel good about an emergency as those tend to lean towards pretty crappy, at best. But in those times when we have to plunk down some money to cover the unexpected, we can go one of two ways with regards to the spending: "I got this. It sucks but this is the type of situation I've planned for" or "Ack, I don't want to use my emergency savings for this but I don't have any other choice." The latter situation is the one we don't want to be in. So how do we avoid it? Well, the concept of an emergency can mean different things to different people.
So here’s what we’re going to do: decide now what is an emergency to you, or at least figure out how you will decide what your e-fund will be used for. In the middle of a (perceived or real) crisis is a bad time to try and think rationally about money.
A good place to start is to task yourself these 3 questions:
Is it unexpected? If you know it’s coming, it’s not an emergency. By its very definition, an emergency is unforeseen, sudden... unexpected. Things that can realistically be anticipated are holidays, birthdays, back-to-school shopping and basic home or car maintenance. Save for those things separately and you won't have to dig into your e-fund when they come around... and they will come around.
Is it absolutely necessary? Something can be important but not necessary, so this is a toughie sometimes. As a financial emergency, it pretty much needs to be a threat to your financial future, your health or your assets.
Is it urgent? We're basically just adding "immediate" to the last point. If it's not urgent, then you need to look at saving some each month until you can afford it. (Just so we're clear, a great deal on a new TV or a vacation doesn't qualify, even if "but, but, but the sale will expire tomorrow!" It may be time sensitive but it's not absolutely necessary.)
There will of course be situations that fall outside of these guidelines, like emergency travel for a family crisis, but thinking it through will give you a chance to decide if the spending is right for you and your goals. Also, just because something is an emergency to someone else does not mean it has to be your emergency. You can choose to help them address it, but remember that it is your choice.
Why do these things matter? Because the more you can plan for and think rationally about it ahead of time, the less reasons you'll have to spend your e-fund. That allows it to stay safely tucked away, waiting for the day you (hopefully never) need it.
In the next post we'll look at how much you may want to try to save in your e-fund.
Are you worried that one bad emergency could derail your hard work towards your savings goals? Let's talk about how you can best prepare.