You got some emergency savings? Congratulations! You’ve given yourself some peace of mind and you’re on your path to financial freedom! But now that you have that stash, let’s find out what are the three questions to ask yourself before you spend your emergency fund just in case you’re eyeing bounty like a pirate with a new telescope.
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Let’s face it. Sometimes you can spend your emergency fund, and sometimes you just can’t.
And I get it, that big pile of cash is tempting to spend if it’s just sitting around not doing much. In fact, having “lazy money” flies in the face of most investing advice because it’s not doing anything for you. But whether your intentions for your own money are noble or naughty, you have to set some ground rules and fully understand the superpower of the emergency fund.
The Super Power of the Emergency Fund?
Yep, your emergency fund gives you superpowers.
Wait, I’m serious.
Okay, Everyone knows that the emergency fund is for emergencies. Like.. if you lose your job… or lose a wall in your house. On harsh days of bad surprises, it’s nice to know that you have some money in the bank to carry you through. There’s something freeing about being ready for an emergency.
But that freedom also lets you be a little more daring! Dashing! Exciting! Knowing that you have an emergency fund in case things go south lets you make bolder decisions. You can go on vacation without worrying that you’ll be replaced when you come back. You can try a new investment strategy knowing you’ll be okay if you make a mistake.
Knowing you can get through the rough patches means you don’t need to play defensive and can start being more aggressive in other areas of your life. Be they professional, financial, or personal.
So like I said, your emergency fund is your superpower that keeps you from being scared of things not working out. And now that you have a superpower, I wouldn’t let you give it up without a fight. (Or at least without asking yourself some serious questions.)
So what are the three questions to ask yourself before you spend your emergency fund?
Question 1: Do you have to spend the money?
My rule of thumb: if it’s a necessity of life like food, shelter, or transportation – then do what you need to do. Anything else – no way.
Sweet discounts and limited-time offers… totally don’t count either. Oh, and in my books, if you’re paying way too much in car payments for a luxury car – that’s not a real necessity either. You can downsize to something more reasonable.
Using up your emergency fund is like losing your superpower. It’s a big deal. So it’s only okay to burn through it if you absolutely have to.
Question 2: Is it a real emergency?
Listen, I’m not going to berate you on what’s a real emergency, and what is not. I think you can tell the difference.
If you’re looking at your money stash because your buddies want to go to Vegas and you want to go too but can’t pay for it… walk away. If your car breaks down in the middle of a highway (even if it’s on your way to Vegas with your buddies) … I guess you can dip into that stash.
I once used up my home repair fund to help pay for a new investment property. I thought I was being Mr. Cool Investy-Pants jumping on a good deal, and I knew I could replenish that emergency fund within a few months. Literally, the next day I had an $8K expense to replace an old roof after a big storm. The worst part – I could have gotten that money from elsewhere. And we’ll get to that later.
Hopefully, you’re not so unlucky that you’d have multiple emergencies on top of one another. (That would suck, but that’s exactly why we aim for financial independence.) Holding on to your emergency fund until it’s a real emergency is what will cover your karmic bases.
From experience, if I ever draw from my emergency fund for non-emergency expenses, even if they seem noble at the time – I get a real surprise within the week.
Question 3: Can you pay for it any other way?
Let’s go back to my dumb decision to blow my home repair fund to jump on an investment. Realistically, I should have transferred my index funds and other liquid investments around to free up some cash. Call it laziness (or over-confidence) but dipping into my emergency fund was the wrong choice.
At least I learned a real lesson on how does Murphy’s Law (“everything that could go wrong will go wrong”) apply to saving money.
So leave no stone unturned before looking at the emergency fund stash. Don’t be lazy and do the right thing.
TL;DR – Emergency Fund
Considering that 57% of Americans are not comfortable with their emergency fund status, consider yourself well-prepared.
Being prepared with an emergency fund is like having a superpower that keeps you from being scared and defensive. Eating into your stash erodes your ability to drive toward your dreams and goals fearlessly. So if you decide to spend your emergency fund… it better damn well be worth it.
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Emergency Fund FAQ
What are the three questions to ask yourself before you spend your emergency fund?
The three questions to ask yourself before you spend your emergency fund are:
1. Do you really have to spend the money?
2. Is it a real emergency?
3. Can you pay for it any other way?
What are three things you should use an emergency fund for?
My rule of thumb: if it’s a necessity of life like:
2. shelter, or
Then you’re justified to use your emergency fund.
Anything else – no way.
What are the 3 steps to building an emergency fund?
1. Determine your non-negotiable expenses for one month (including transportation, housing, and food.)
2. Make a goal to save one month’s worth of expenses by avoiding all unnecessary spending.
3. Once you have a one-month emergency fund, make a goal to upgrade it to three months and then six months, but you can be slightly less aggressive.
How does Murphy’s Law (“everything that could go wrong will go wrong”) apply to saving money?
If you want to use your emergency fund for a non-emergency, even with the goal of replenishing it, remember that you’ll likely have a real emergency within a few weeks of spending the money. So be sure to review the questions to ask yourself before you spend your emergency fund.