Ideally, you have an emergency fund sitting around waiting for a rainy day. But what exactly constitutes a rainy day? How do you know when an emergency is truly an emergency, warranting the spending of your hard-won savings?
Emergencies are some of the most devastating events in our lives and financial planning efforts. A sudden accident or loss can create expenses that throw out our carefully crafted budgets and in some cases can even lead to bankruptcy. To build the optimal financial emergency plan, you have to be prepared to recognize what is truly an emergency and position your money accordingly.
Here, we’ll demonstrate the kinds of questions you can ask and preparedness strategies you can employ to come away from an emergency financially intact.
Asking the Right Questions
When determining the severity of an emergency as it relates to your financial plan, the first step is always to ask yourself a series of questions. The right questions will help you decide if tapping into your emergency fund is necessary right now or if you have other options.
Many people panic in the face of unexpected circumstances and end up accessing their emergency finances when that doesn’t need to be the case. You can better decide when a perceived emergency is worthy of breaking the bank by answering a few questions about your current circumstances. This can also be a helpful exercise in mitigating anxiety and keeping calm.
So before you throw down that credit card or withdraw cash from your savings, ask yourself the following questions.
Is this payment avoidable or negotiable?
Often, what seems to be an emergency might not actually be as immediate as it might appear. This means that you may be able to apply some workarounds, start a payment plan, or have expenses forgiven altogether depending on other factors. If at all possible, take a moment to explore the options available to you before making a payment.
For instance, many individuals without health insurance might feel overwhelmingly crushed by a sudden medical emergency and the subsequent bills that come due. Medical bills are the number one cause of bankruptcy in the United States for a reason. However, many care facilities will also work with the underinsured.
Appeal to hospitals, landlords, mechanics, or any other servicer who provides the means to get yourself out of an emergency. Often, these professions will work with you to create payment plans and other options that will work for your budget without you needing to spend your emergency savings.
Will not using my energy fund now cost more later?
Then, ask if avoiding or delaying an emergency expense will end up costing you a lot more down the line. You might be tempted to neglect the doctor altogether, attempt to patch up your totaled car yourself, or simply ignore due bills. However, many of these choices could end up costing a lot more down the line.
A medical emergency, if not treated immediately, can develop into a larger, long-term condition that is costlier to treat. While you might get the medicine or help you need at urgent care, failing to visit could mean surgery and other expensive treatments down the line. Instead of taking these financial risks, take care of any health issue as quickly as possible.
Fortunately, you’ll have choices in many emergencies. For instance, going to an urgent care can be much less expensive than a trip to the ER. But it depends on the type of illness you are experiencing. In the case of aggressive symptoms, going to the ER is unavoidable. The best thing you can do will be to assess the emergency and do what is best for your overall health and well-being.
Is the emergency a job loss, a medical necessity, or an unexpected death?
Finally, it helps to ask yourself if the emergency you are facing falls under three specific categories. Some financial experts advise that these are the only conditions in which an emergency fund should be utilized, but that will depend on your own discretion. These three conditions are:
- Job loss
- Covering medical deductibles and waiting periods
- An unexpected death
Many financial advisors will claim that these are the only true emergencies because other situations can be planned and budgeted for. You should, after all, be setting aside money for regular vehicle repair and other necessities. However, you can’t plan a medical emergency to coincide with meeting your deductible or falling within a waiting period. Similarly, you can’t be expected to save money in case of an unexpected death in the family.
These three categories will almost always warrant tapping into your emergency funds. From here, all you can do is be prepared with a healthy budget and know how to apply your emergency money effectively.
The best way to avoid using your emergency savings fund is to be prepared for the little emergencies that occur every day. From car accidents to home repair, these are instances for which you can set aside some money every month to mitigate emergency costs.
Everyone has challenges to overcome, and it helps to build a budget that can accommodate these challenges as they come up. Being prepared means positioning your finances and lifestyle so that an emergency doesn’t knock you in a hole. To better protect yourself against financial devastation in the event of a disaster, consider the following:
No one can guarantee against an accident on the road. From severe weather conditions to distracted divers, there are all sorts of factors that you cannot control. However, by being prepared, you can better ensure that an accident won’t leave you in a financial ditch — even if you end up in a literal one. From tools to keep in your car — like jumper cables and spare tires—to insurance options, here’s what you need to avoid a financial emergency in an accident:
- Liability insurance for your vehicle, at a minimum
- First aid kit
- Standard car maintenance tools including extra fluids, jumper cables, jack, a spare tire, flashlight, food, and water
- Contact information for insurance and injury lawyers
But accidents don’t just happen on the road. Home emergencies can be expensive, too, no matter how minimalistic your home design is. While such a design can come with a host of benefits including reduced maintenance costs, it helps to be prepared with other tools for keeping emergency costs at a minimum. Here are a few ideas:
- Homeowners or renters insurance
- Contact information for plumbers, contractors, and emergency maintenance professionals
- Fire detection and extinguishing tools
Everyone has a medical emergency at one point or another. With the U.S. healthcare system, these emergencies can lead to big bills that create an unbearable financial burden. However, there are a few items you can accumulate to help you avoid monetary strain. These include:
- Comprehensive health insurance
- A health savings account
- A paid off deductible
- Healthy living
Applying Your Emergency Fund Effectively
The unfortunate reality of our world is that emergencies will happen to everyone. Without thorough preparation, these emergencies could lead you to spend what you’ve managed to save for such a situation. However, you should first understand what constitutes an emergency versus the expenses you can anticipate.
By asking yourself these questions, you can better understand when an emergency actually warrants breaking into your emergency fund. From here, you will be prepared to come away from just about any incident financially intact.
Consider these tips as you navigate emergencies and plan a financially comfortable retirement.