Use of 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 out 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:
1. Job Loss
Many people have lost their jobs in the current scenario. Jobs of many people are at risk. An 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; an emergency fund accumulated in a liquid fund can support you and your family.
2. Medical Emergency
Medical emergencies are unexpected events. When you face any other medical emergency, an emergency fund can come to aid in these situations.
If you don’t have health
insurance, you may have to shell out thousands on medical treatment. Even if
you have health insurance, depending on your health insurance plan, you may
need to take care of pre-hospitalization and post-hospitalization costs from
your pocket.
3. 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.
4. 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.
5. 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 emergency, it is important to help them navigate difficult times with your emergency fund.
6. Urgent travel requirements
In this era of globalization, many people are living in metro cities that are hundreds of kilometers away from their hometowns. Hence, people may want to visit their hometown for any family emergency. As booking flight tickets at the last moment is expensive, one can use their emergency savings account to book flight tickets.
Also, urgent relocation to
another town may also require dipping into your emergency fund.
Conclusion:
The 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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