An emergency fund is a savings account meant to be used in the event of something unplanned. This includes things like illness, an accident, natural disasters or death of a family member. The emergency fund is meant to cushion the blow of losing money when an event forces greater expenses. For instance, flooding or a fire can require buying many new things. And while insurance can help replace housing, it won’t cover the replacement of every single item or the stay at a hotel while you find new housing. An emergency fund is a safety plan that helps reduce anxieties when life throws you a wrench.

Knowing how to use your emergency funds will make it easier to restart a new one once you’re back on your feet. It will also help you avoid debt. Since every situation is unique, it’s important to focus on what you or your family needs but the following suggestions can offer guidance on how to use an emergency fund.

How to use an emergency fund

An emergency fund is time-sensitive and reliant on the current financial situation. Choosing what to use it for can be difficult to navigate, especially if you’ve just experienced job loss. Since the main purpose of an emergency fund is to reduce anxiety around money, knowing how to use it can also be helpful.

Consider the following steps when choosing what to use your emergency fund:

·       Income replacement in the event of job loss.

·       Income assistance in the event of illness or injury.

·       Appliance repair or replacement that costs more than your savings allow.

·       Out of pocket health costs.

·       Emergency costs in the event of a disaster, such as a stay at a hotel if your house caught fire.

To know how to use the emergency fund) so that you don’t exhaust it immediately, think of the following characteristics.

·       Is it expected and expensive? For instance, if you had planned a project to replace the tiles in your home or buy a new car. Don’t use the emergency fund.

·       Is it expected and inexpensive? Don’t use your emergency fund. This includes things like haircare.

·       Is it unexpected and expensive? This is the best time to use an emergency fund. This includes expenses that arise from accidents, disasters, or illness. Shifting those expenses to a credit card can damage your financial stability. Use your emergency fund here.

·       Is it unexpected and inexpensive? This includes miscellaneous costs. You can cut back on your salary to make these purchases.

It’s important to remember that these categories are more-so for people who haven’t lost their income. Deciding where to use your emergency fund is still up to you.

Where to use an emergency fund

The purpose of an emergency fund is to make sure you don’t have to end up in survival-mode when you face a financial crisis. It also means you don’t have to rely on credit cards or go into debt with loans simply surviving.

1.     Outline the most important expenses

Everyone’s expenses vary. But the most important ones are housing, food, and utilities. If you’ve experienced an injury that can take up to a year of recovery, an emergency fund should be able to cover these costs comfortably if you got a pay cut from having to take sick leave or unpaid time off. Look at how much you spend monthly on the most important things. When setting up your emergency fund, use this as a jumping off point to determine what your goal is for the fund.

2.     Unplanned expenses

An emergency fund is also great for something unexpected. This can include disasters, illness of a pet or relative—something that may not be insured. Dipping into your emergency fund to pay for this doesn’t affect your regular spending so that you can avoid debt. You can also use the emergency fund for repairs to house electronics or your car. You can also use the emergency fund to replace a stolen laptop or phone, if you don’t have insurance or if your insurance company refuses to replace the lost or damaged device.

3.     Deductibles

In the event of a loss or reduction of income, you can use your emergency fund for your deductibles. This includes costs like loan repayments, or insurance. In addition to paying for your regular expenses like rent, bills or school fees, an emergency fund can help you prevent debt or defaulting on insurance. If you lost your health insurance, it could spell disaster if you fell sick or got an injury. Setting up an emergency fund that covers deductibles can ensure you save your financial future.

4.     Cushioning expenses

An emergency fund can help with unplanned expenses but it can also help when they become overwhelming. Picture this, you’ve enough money to pay to replace a broken fridge. However, imagine ending up with car repair costs, needing to replace your phone and laptop and getting a plumbing issue. The collection of such expenses can be draining to your savings. And having to rely on credit cards just accrues debt. Dipping into the emergency fund in such an instance can be very helpful.

Takeaway

An emergency is money set aside only to be used during emergencies. Don't use this fund to make frivolous purchases or go on impromptu trips. You can consider putting this money in a fixed deposit or other interest-accruing accounts to let it grow since it's money meant to be taken out only during emergencies. It's best practice to use any leftover from your savings to top up the emergency fund.