Personal Finance

Financial planning: How and why to use an emergency fund

Figure out what an emergency fund really means.
Figure out what an emergency fund really means. AP file photo

Despite our best efforts to budget, there will always be a time when something unexpected arises. And while it may seem impossible to budget for the unpredictable, there’s actually a solution: an emergency fund.

How much should I save?

A good rule of thumb for an emergency fund is for it to be enough to cover three months of expenses. Expenses that should be covered in an emergency fund food, shelter, and clothing. Luxuries like internet, trips to the salon, or eating out are not included in an emergency fund.

Start contributing a little at a time to build to the three-month mark. At that point, you can decide if you want to continue putting money into an emergency fund or start investing it in other places. How you decide to budget your money is up to you, but remember you shouldn’t touch this money unless it’s a true emergency.

What’s not considered an emergency?

Here are some things you may have used as an emergency fund in the past. These expenses may seem urgent but often, they’re a result of bad budgeting and they can quickly drain your money if you don’t keep those behaviors in check.

Unexpected car repairs are a common misuse of an emergency fund. While you don’t know exactly when your car will need work, we can safely assume that it will need work at some point. Use a separate account to save for car work. The same goes for large home expenses, like broken appliances or maintenance.

You have the power of knowing you’ll need to pay for these things eventually — you just don’t know when. Emergency funds should be reserved for situations when you don’t have knowledge of either.

What is considered an emergency?

Emergencies are classified as unpredictable both in timing and the situation. For instance, job loss or layoff; an unexpected medical expense that may not be covered by insurance; or funeral expenses that life insurance may not cover, like a last-minute flight to the services.

How else can I be prepared?

The amount in your emergency fund will obviously depend on your income and what may classify as an emergency in your situation. But it may also be affected by other plans or financial efforts you have in place. For instance, if you have life insurance or medical insurance, certain emergency situations may not require the emergency fund.

Whenever you’re planning to save or spend based on your personal budget, it’s always smart to sit down with an expert and get their opinion.

Kat’s Money Corner is posted on Dollars & Sense every Tuesday. Kat Hnatyshyn, when not blogging or caring for her little ones, is a manager with CommunityAmerica Credit Union. For more financial chatter, visit http://communityamerica.com.

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