Build Your Emergency Fund? Know When to Use Your
Emergency Fund
In the current state of affairs, it has become
important to build a sizeable emergency fund corpus to take care of any
emergency requirements.
It is important to build an emergency fund.
Similarly, it is important to know when to use your emergency fund.
Typically, you can accumulate your emergency fund
in a savings account and liquid fund. We suggest that you park one-third of
your emergency corpus in a savings account to meet your short-term emergency
expenses and two-thirds in a liquid fund to take care of your long-term
expenses.
In this article, we will find out when you should
use your emergency fund.
Questions to ask yourself before using your emergency
fund?
Before you dip into your emergency fund, you can
ask yourself these three questions.
- Is it unexpected?
Unexpected events such as job loss or house repair
call for an emergency fund. Diwali shopping or yearly car maintenance or health
check-up are expected events and take place every year.
- Is it necessary?
This question will help you figure out between a
need and a want. It is because at the moment, it may be hard for you to figure
whether it is an emergency.
- Is it urgent?
Ask yourself if the situation is urgent or whether
you can postpone it to a later date. If you can postpone it with no negative
implications, there is a higher probability that it is not urgent.
When you should use your Emergency Fund?
The three questions mentioned in the previous
section will help you understand whether you need to use your emergency fund.
However, there are certain situations where it is essential to use your
emergency fund. Here are six such circumstances:
- Job Loss
Many people have lost their jobs in the current
scenario. Jobs of many people are at risk. Emergency fund can help in such
circumstances. The emergency fund can take care of the expenses till you find a
new job. Other than taking take care of expenses, you will also be able to pay
your outstanding EMIs and insurance policy premiums on time.It will keep your
family protected, protect your credit score from slipping, and avoid piling up
credit card debt. As in worst circumstances, you may be without a job for a few
months; emergency fund accumulated in a liquid fund can support you and your
family.
- Medical Emergency
Medical emergencies are unexpected events. When
youface any other medical emergency, an emergency fund can come to aid in these
situations.
If you don’t have a health insurance, you may have
to shell out thousands on a medical treatment. Even if you have a health
insurance, depending on your health insurance plan, you may need to take care
of pre-hospitalisation and post hospitalisation costs from your pocket.
- Car Repairs
Your car just like any other form of machinery
requires proper maintenance. Even if you take your car for annual maintenance,
there can be an unexpected need to get your car repaired by a mechanic. The
amount required to repair your car will depend on the damage. As it is an
urgent situation, there is no harm in dipping into your savings account
emergency fund to repair your car.
- Home Repairs
Home repair is another unexpected urgent expense.
Your roof falling down with no warning, water pipes bursting and your AC
failure in the blasting summer are a few of the examples that will require your
immediate attention. You can use your short-term emergency corpus to take
care of these requirements.
- Family Emergency
Families form an integral part of our lives. Our
family members may face emergencies and may not be financially well equipped to
handle the situations. In these situations, it becomes our responsibility to
take care of our family members. Whether they are facing a medical emergency or
any other emergencies, it is important to help them navigate difficult times
with your emergency fund.
- Urgent travel requirements
In this era of globalisation, many people are
living in metro cities that are hundreds of kilometres away from their home
town. Hence, people may want to visit their hometown for any family emergency.
As booking flight tickets in the last moment is expensive, one can use their
emergency savings account to book flight tickets.
Also, urgent relocation to another town may also
requiredipping into your emergency fund.
Conclusion:
Emergency fund is a must have for everyone. There
can be scenarios where you may be tempted to use your emergency fund for
non-emergency purposes. In that case, it is important to ask yourself the three
questions and figure out if your emergency is any of the six emergencies listed
above. This will help you access your emergency fund for the right reasons.
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