The worst mistake that quite a lot of people make these days is to confuse a situation as an emergency, when it actually isn’t one. What follows is that people tend to use their set-aside emergency funds
for such so called “emergencies”. It is extremely important to realise if a situation actually classifies as an emergency to make the right use of funds you set aside for it.
Following are a few majorly false financial emergencies you are likely to get confused about.
Although you might have guests coming over from abroad, and you want to make sure your place looks spic and span, it is not enough of a reason to tap into your investments. This is a common mistake people make, leaving them barehanded when an actual emergency strikes. If you want to renovate your place, cut back on some routine expenses and use the savings from them for this purpose.
You should always be able to distinguish between an opportunity and an emergency. A good deal on a resort in Hawaii or a cheap ticket to Tahiti Islands is surely a good travel-opportunity, but not by any means, an emergency. While you may surely make the most of this opportunity, using your emergency funds for it is far from an option.
Giving a gift to someone is a nice gesture, but you must not get carried away with it. Instead of gifting an expensive gadget that requires you to withdraw money from the funds, you should opt for something that is a little more in-budget
When Should I Use My Emergency Funds?
The key purpose of setting up an emergency fund is to use it when an unexpected financial emergency knocks on your door. According to a research, the major financial emergencies include paying unexpected medical bills, major life events, releasing a debt-mountain, job-loss, legal costs, and funeral costs etc. Using your invested funds is a wise idea if your expenses are along the same lines.
Several other experts also allow the usage of your emergency fund money to pay insurance premiums, car payments, childcare costs, or home-repairs in case of a natural disaster.
How to Deal with Non-Emergency Situations?
The best way to deal with such situations is to first estimate the amount of money a particular non-emergency irregular expense cost you the previous year. Then divide that annual amount into monthly costs and set a percentage of your monthly income to cater to those costs. This will allow you to address both types of expenses in a more manageable manner, and consequently cushion your financial needs throughout the year.
To distinguish between the different emergencies, classify them in four sections:
- Urgent–Important: You should tap into your emergency funds for them.
- Not urgent–Important: Set emergency funds to cater to these.
- Urgent–Not important: Use you non-emergency funds for them.
- Not urgent–Not important: It is better to avoid such expenses.
Following these guidelines will help you live a happier and financially stable life.