Wants vs. Needs: When to Dip Into Your Emergency Fund
Having an emergency or back-up fund is important. This money that is set aside for unplanned expenses is separate from your retirement savings and college savings accounts. However, according to a study by the Financial Industry Regulatory Authority (FINRA), 56 percent of Americans lack the money to cover expenses for three months in an event of an emergency. Personal finance experts advise keeping a minimum of three to six months of expenses or more in your fund as a cushion.
But how do you know when it’s appropriate to tap into that rainy day stash? It boils down to wants vs. needs. According to financial expert Dave Ramsey there are three ways to measure whether a situation warrants dipping into your emergency fund: Ask yourself, is it necessary, urgent or unexpected?
With this framework in mind, take a look at a few wants vs. needs match-ups to see which ones could be dip-worthy.
LASIK Surgery vs. Surgery to Repair Torn ACL
You might think LASIK is a necessity that will make work and life easier, but if your glasses or contacts are doing the trick, don’t have tunnel vision — save up for this elective surgery. (Exception: astronauts!) Surgery to repair a torn ACL (like any major bodily injury) is a necessary operation that could incur extra costs, such as your medical deductible, physical therapy or even lost wages and transportation if you can’t drive. Get a leg up on the situation and feel free to dip into your emergency fund.
Kitchen Facelift vs. Burst Pipes
Those formica countertops might have peaked in the disco era, but if everything’s in working order, updating them isn’t an emergency. Cosmetic kitchen upgrades are great for resale value, but that’s something you can save for in advance. A burst pipe or water backup, however, is an urgent event. When a wall of water is inching ever closer to the leather couch in your man cave, something needs to be done, pronto! The cost for cleanup and restoration could run between $2,000 and 10,000, according to houselogic.com. If you already have insurance coverage for water backup, this could help cover some of the costs, but it’s wise to have an emergency fund to plug any additional financial holes.
No Bonus vs. Layoff
Don’t plan that sunny vacay betting that your bonus will materialize. Unless your bonus is 100 percent guaranteed, factor that vacation expense into your monthly budget. If your job is eliminated or your hours are cut, however, this is an unexpected scenario where your emergency fund can provide a financial bridge and peace of mind until you land your next full-time gig.
According to Forbes, the most common uses for an emergency fund include a medical emergency, job loss or transfer, major household repairs, car problems or even funeral expenses. Every household has different wants and needs, but these “dipping” guidelines are a great place to start.