If you’ve been wise enough and determined enough to follow the sage advice of financial gurus, you are probably patting yourself on the back for having established the much coveted emergency fund as part of your long term financial plan. With this money you are prepared to weather any storm with the cash reserves necessary to maintain sound financial footing in the event of a job loss or a major life changing situation, regardless of the economic conditions around you.
Now that you have this sacred cow of cash busy earning interest for you in a money market fund or savings account, all your troubles are over, right? Well, not necessarily. What happens if you find yourself in a financial pinch? At what point does a financial setback turn into a financial emergency warranting a raid of the sacrificially acquired and painfully maintained emergency fund? Generally, there are a few basic categories of life circumstances that precipitate considering the withdrawal of emergency funds. Some of them are legitimate and some are worth giving a second, or even a third, thought.
1) Job loss. If you or your spouse loses your job, your household finances could go into a tailspin quickly. Before you go running to the bank to draw on that emergency fund, take time to evaluate your circumstances and determine just how bad things really are. You may be able to minimize the impact on your emergency funds by making some temporary changes in your lifestyle. Cut back on unnecessary expenses like fancy cell phone plans, cable TV, eating out frequently or vacations. These are all expenditures that can easily be re-instituted when times are better. Check into unemployment benefits in your county or state. You may find some relief there as well.
2) Medical emergency. Your health is your most valuable asset. Before you do anything rash, check with your company or your insurance carrier to see exactly what expenses are covered and what you will have to deal with out of pocket. Are you covered by short or long term disability insurance? Find out what resources are available to you before you dive into that emergency fund and put off drawing on that money for as long as possible.
3) The opportunity of a lifetime comes along! Your best friend has stumbled across a sure-fire business opportunity that’s “guaranteed” to quadruple your money and he has magnanimously offered to let you buy in right from the start. Is this a good time to make use of your emergency fund? Not so fast! Emergency funds are just that, money to fall back on when every other option has been exhausted. If you don’t have money to risk for investment purposes, you’d be better off walking away from this one.
4) Your child’s college education. Remember, you won’t be able to borrow money to finance your retirement. Everyone will be better off in the long run if junior applies for every scholarship he qualifies for and borrows the rest to finance his own education. Don’t choose a school of higher learning that exceeds the reasonable amount of money someone if your financial station in life should be expected to pay. Unless you have established a separate fund for junior’s college expenses you should never sacrifice your own future financial security to pay for college.
Your emergency fund should never be treated as a cash reserve to be dipped into anytime it seems convenient. True emergencies can and do come up in life. If you ever find yourself in such a situation you can be sure you will recognize it for what it is and you’ll want to be prepared to deal with it from a position of strong financial strength. If you are somehow lucky enough to dodge life’s most defeating catastrophes, you will end up with a nice lump of money to pad your retirement or to set aside as an inheritance for your heirs.