According to a recent Bankrate survey, 19 percent of Americans have used their emergency fund during the coronavirus outbreak. Does this mean you should tap your savings, too?
While the full economic fallout of the lockdown remains to be seen, millions of people lost their jobs. Even if you haven’t been laid off, there’s a likely chance you lost some wages due to the pandemic.
During all this financial uncertainty, you may not know if it’s the right time to tap into your emergency fund.
When Should You Use an Emergency Fund?
An emergency fund is a short-term savings account that acts as a safety net when things go sideways. It’s designed specifically to help you tackle unexpected expenses, like an unusually high bill, essential repair, or medical prescription.
It’s also there for rainy days when everything seems to go wrong. A robust fund can keep you afloat when you lose out on pay, lose your job, or suffer from an illness.
Anything that interferes with how much money you bring in could be a reason to dip into your emergency fund. These savings may cover living expenses until you’re back on your feet.
But before you tap it, ask yourself these three questions:
- Is it necessary? You don’t know how long the pandemic may last, so there’s no point in wasting your savings on fun splurges. Stick to the essential things you need to survive.
- Is it urgent? If it’s something you can postpone safely or live without indefinitely, consider putting this purchase on the backburner until you’re in a better financial position.
- It is unexpected? Predictable expenses like birthdays or property taxes are things you can see a mile away, making them easy to budget in advance. Unexpected expenses can come out of the blue, making them much harder to budget for.
What if it’s Not Enough?
Generally speaking, it’s recommended your emergency fund contains 3 to 12 months’ worth of living expenses. But what if you have less than that? What if you have nothing at all?
When your savings fall short, borrowing an installment loan may be an option.
Just be careful when you tap into installment loans online. It’s not a 1-for-1 replacement for your emergency fund, which can help you with any living expense while you’re in a tough spot.
The installment loan lenders at MoneyKey recommend applying for these products only when you need help covering a small, non-recurring emergency expense.
Under this rule, an installment may be an option if:
- You have unexpected car trouble that racks up a big bill with the mechanic.
- You fall ill out of the blue and need help covering your prescription antibiotics
- You break one of the lenses of your glasses and need to replace the pair
An installment loan is not an option if you need more money to buy groceries or cover a recurring bill.
Building an Emergency Fund from Scratch
Don’t be afraid to use your emergency fund when things get tough; it’s there for you to spend one day when you need a little extra help.
Just remember, you need to keep saving if you expect it to have your back in the next emergency. Whether you keep your hands off your fund, drain it for all its worth, or never had one to begin with, it’s always a good idea to contribute more into savings.