We have paid off all our debts except for our house and have an emergency fund with 6 months worth of expenses in full. When I talk to people, it seems like there are different opinions on what constitutes an emergency. What guidelines would you suggest when deciding whether to use an emergency fund?
When you want to put money into your emergency fund, there are three things you should ask yourself. One, is that unexpected? Things like Christmas, birthdays, and even certain bills come around the same time every year. If you haven't created a budget for these yet, start now. Otherwise, you might end up using your emergency fund for something you didn't plan for enough.
Second, is it absolutely necessary? Most of us think we understand the difference between needs and wants, but sometimes the line can get a little blurry. If your car completely breaks down and you need transportation, use your emergency fund to buy something affordable and reliable that you can buy with cash. But don't spend your emergency fund just to upgrade your nice car to one with a million bells and whistles. It's a desire, not a need.
And third, is it urgent? Sometimes they act like adults. Every idea that comes to your mind is not unexpected, necessary, or urgent. You can live like that if you want, but as a result, your emergency fund will be depleted quickly. So what should you do if a real emergency occurs?
Practice the art of patience. Avoid impulse purchases. Emergencies include air conditioner failure in the middle of summer, communication outages, and sudden unexpected medical expenses. Big sale at Walmart? No. Concert tickets? Absolutely not. Those fancy new shoes you saw in the store window? Give them a break!
An emergency fund is about long-term security, not instant gratification. Don't use it on a whim. But don't be afraid to use it if you really need it.