When to Use Your Emergency Funds

These days, your emergency fund sources are dwindling quickly. Credit card interest rates are skyrocketing, home equity loans are being drastically cut, and personal loans are going the way of the Dodo. If you don’t have an emergency fund, start one today. If you do have one, it’s important to spend the money properly to ensure that you don’t come up short when faced with a more serious situation.

What Is An Emergency?
Emergencies can be any number of things, so it’s almost easier to say what they’re not.

These things are not emergencies:

  • Routine home or auto maintenance
  • Expensive clothing/accessories
  • Personal care items
  • Cable TV, DSL, cable internet access
  • Entertainment (concerts, DVDs)
  • Online auctions
  • Collectibles

If your engine blows up, then that’s probably an emergency. If your tire goes out and it’s no longer under warranty, then you probably should have seen that coming and already built replacement tires into your budget.

If you see a really great collectible on eBay, that’s not an emergency. If you’re serious about collecting, then the cost of it should be built into your budget. If it’s not, you don’t need to buy it right now.

These events are emergencies:

  • Job loss
  • Major illness
  • Loss of housing
  • Natural disaster
  • Major housing repair
  • Major auto repair
  • Death

What to Spend Emergency Funds On
Once you experience an emergency, you still have to be careful spending your money. Depending on the length of the situation, you could need these funds for several months. Your first priorities should be:

  • Housing costs
  • Food
  • Fuel
  • Major automotive repair
  • Other transportation
  • Education/day care
  • Emergency medical expenses
  • Major home repair
  • Travel for family death or illness

Additional Sources of Emergency Funds
Alternative sources of funds depend on the type of emergency. For example, if it’s auto repairs and you have a Goodyear card, use that to spread the payments over a couple of months and hopefully fit them (or part of them) into your regular budget.

Sell Stuff: If you only need a little bit of money to get you by, consider selling some of your stuff like the refrigerator in the garage, your DVD or CD collection, old furniture you don’t need anymore. Not only will you get a little extra money, but you’ll reduce the clutter!

Credit Cards: You can use a credit card for travel, food, and education, but try to pay the bill with funds from your savings account, and then from your emergency fund. Avoid collecting interest if at all possible because those cards could be your saving grace in an extended situation. If you run through your savings completely, you can probably cover a few month’s most basic expenses with your cards by only paying the minimums. Develop a plan to replenish your savings and then pay off the cards as soon as the emergency is over.

Home Loans: Although home equity loans and HELOCs have been severely curtailed, you may still be able to tap some equity if you’ve built up a sizable stake in your house. Never borrow more than 90% of the current market value of your home, which is probably the most you can get now anyway. As soon as the emergency is over, make paying the loan back a priority. Yes, the interest is tax deductible, but it’s still interest.

Family Loans: Family loans can be tricky, but dire situations require dire solutions. If you’ve lost your home, you can’t work, and you’ve run through your savings, then it’s time to ask your parents or siblings for a loan or to consider moving in with them until you get back on your feet. Don’t live on the street or in a shelter because you’re too proud to ask for help. Once you’re on your feet, pay your family back first. Corporations can wait, family can’t.

We all hope an emergency won’t happen, but no one goes through life without at least one. People get sick, businesses close, disasters strike. It’s part of life. If you have an emergency fund and are prepared to spend it wisely, you can get through any situation.

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