You may have heard that having an emergency fund is significant to avoid money crisis when you need it most. Yes, it is true that the importance of an emergency fund is definitely quite significant. If you have an emergency fund, you can meet expenses that you had not planned for. Thus you can avoid incurring debts to survive the situation.

But, many people pull out cash from their emergency fund to meet some insignificant expenses like funding a holiday, making down payment on home, starting a business, or remodeling a house.

So, you may be wondering, when to pull out cash from your emergency fund. Which situation is called the actual emergency? When is it fine to pull out cash from the emergency fund?

Let's find out the answers:

The concept of emergency can vary among people. But, some situations are usually considered as emergency, which are as follows:

1. Any medical emergency

Whether it is an earache or acute bronchitis, any uncertain illness can cost you hundreds of dollars. And the most heartbreaking emergency, which can occur with anyone at any time, is an accident. It can cost you even thousands of dollars to recover. I wish, with the God's grace, you all be well throughout the life, but you must be prepared to fight back such crisis situations.

If you have money, you can get the best possible medical attention, as fast as possible, without using the credit cards for paying the bills.

Sometimes, medical insurance may not be enough. In such a situation, you can pull out cash from your emergency fund without incurring additional debt.

With the help of the emergency fund, you will not find yourself into the knee deep medical debt.

2. Unemployment or a sudden job loss

Ouch! A sudden job loss or an unemployment can be a havoc both financially and mentally. Imagine, you have started a family a couple of months before and you receive a fired letter from your employer. Or due to the unemployment, you have no other option than shifting to a small apartment with your newly born child. I don’t want you to feel uncomfortable by saying these scary lines; the stats are echoing the same.

According to a survey conducted by the GOBankingRates, "15 percent of Americans say their biggest financial fear is losing their job. 18 percent say their biggest fear is living in perpetual debt."

An emergency saving cushion can help you to survive in such a situation. You can at least survive without incurring huge debts.

3. Home repair cost

Renovating or remodeling your home doesn't qualify for an emergency; but a roof damage, broken heater, plumbing and other property damages definitely qualify as emergencies. If a leaky rooftop is bothering you, then you can consider a home repair service using the emergency fund.

You will be amazed when you see the home repairs are done without giving extra stress to your monthly budget.

4. Vehicle related issues

For most of us, our car is the only reliable means to reach the office. I hope you are one of them. But, any car breakdown issues like dead batteries, empty gas tanks, alternator faults, bad clutch cables, and flat tires can cost you dearly. Claiming insurance to mitigate car breakdown cost may not be a wise decision.

An insurance claim can increase the yearly premium. So, to avoid paying the extra premium charge, you can use the emergency fund to fix you car, if it’s not a huge expenditure. Finally, it’s your judgment.

Many people take out a payday loan to fix the automobile issues, which is a bad financial decision. Payday loan comes with highest interest rate. If you are not able to repay the loan within the fixed time, you will be in debt soon. To avoid these kind of complications, you can rely on an emergency fund. You can easily resolve the vehicle issues without inviting any kind of financial danger.

5. Funeral costs

According to the National Funeral Directors Association, the average cost of an adult funeral is about $5,582. Purchasing last minute flight ticket for reaching the deceased or taking unpaid leaves from work can be stressful for your wallet. I can understand that planning for saving money for such an event is quite uncomfortable, but it's a necessity.

How much of emergency fund is required?

Many people also wonder what amount should be kept in the emergency fund.

See, the building of an emergency fund gives you the time to adjust to your economic condition without changing your lifestyle drastically. Thus the size of the emergency fund will also vary as per the needs of your family. Usually the factors that affect an emergency fund are the income of the family, number of people who earn in the family, the stability of your employment, the total assets you possess, and the total debts you owe.

There are also other factors that affect the size of your emergency fund, such as the size of your insurance deductibles, the insurance coverage, and the general attitude of the family towards risk and security.

It is advisable that you save a minimum of two months’ salary annually. As a rule of thumb, the more your fixed monthly expenses are, the larger should be your emergency fund.

How should you build your emergency fund?

One related and important question is, how can you build an emergency fund?

The answer will be: You need to plan an emergency fund in such a way that it is put in a savings account that is easily accessible. In this way, you can access it whenever you would need it.

Usually this type of savings account doesn’t give you a higher rate of interest. You should always prevent yourself from accessing this fund for things that are not important enough just because it is easily accessible.

You should invest your emergency fund in a conservative manner.

Lastly, an emergency fund provides you a sense of security, which develops a peace of mind. Most of the Americans struggle to save, but you can be exceptional and inspire people around you by saving money into an emergency fund.

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