Wouldn't it feel great to have a buffer between you and the curveballs life throws at you, turning a crisis into...
4 Minute ReadTopic: savings
You know the drill—something breaks, wears out, or costs more than you can cash flow. So where does the extra money come from? If you’re following Dave Ramsey’s seven Baby Steps, you’ve got two options: dip into your emergency fund or start a savings fund.
Your emergency fund is the money you’ve saved for those unexpected costs that would otherwise blow your budget, like a midnight trip to the emergency room. Your savings fund is the money you’ve been socking away toward a future goal, like a cruise to the Bahamas.
But not every situation is as clear-cut as medical bills and island getaways. So what classifies as a true budgeting emergency? It all boils down to these three simple questions:
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1. Is It Unexpected?
Life has a few surprises we could all live without. A job layoff is one of them. But your emergency fund should help by keeping your lights on and your belly full until you land that next dream job. And if a tornado or flood visits your neighborhood, it’s perfectly fine to use your rainy-day stash. Let it cover your insurance deductibles or other property damage your policy doesn’t cover—that’s what it’s there for.
Annually reoccurring expenses, however, are not an emergency. Christmas happens on December 25 every year. So there’s no excuse not to save up before the gift-giving season hits. Same goes for back-to-school shopping. It shouldn’t come as a shock that your kids need new binders, index cards and composition notebooks every August. By saving a little each month in a savings fund, you can actually enjoy these big occasions instead of dread them.
2. Is It Absolutely Necessary?
Necessities are often confused with wants, but the two are oceans apart. If your car breaks down, that’s your transportation—you need to get it fixed so you can get to work! Or if you discover a forest of mold growing behind your bedroom walls, you need to have enough cash on hand to temporarily move out and pay for the cleanup. Those situations are emergencies!
But if you’re just tired of the bubblegum pink tile in your bathroom, or if you suddenly need a new convertible, think again. Your house and car may be ugly, but as long as they’re safe and reliable, cosmetic fixes are the domain of savings funds. New stuff is great, but don’t steal from your needs to pay for your wants.
3. Is It Urgent?
When an immediate need arises, the last thing you should worry about is how you’re going to pay for it. So if your child catches a baseball with his face and needs stitches or your just-replaced furnace suddenly dies in the dead of winter, don’t stress. Focus on the task at hand and leave the rest up to your emergency fund.
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Big sales, however, are not urgent. Just because your favorite appliance shop is having the closeout sale of the century doesn’t mean you deserve a new washer, dryer, oven and fridge. If you want to replace old but still-functioning appliances, flash all that cash you saved up in your savings fund and see what kind of deals you can score.
If You Have to Use the Money, It’s Okay!
Your emergency fund may feel like a ton of money just sitting there doing nothing, but it’s actually doing a lot. It’s your insurance policy against the unpredictable. So don’t drain it just because you see something shiny and new.
On the other hand, give yourself permission to use your emergency fund if you have an immediate, unexpected expense. Just remember to replenish your savings as soon as you get back on your feet. You never know when you’ll need it next.
Remember, savings is the margin between you and stress. Ready to start saving for emergencies and big purchases? The first step to saving is to create a plan for your money—and that plan is called a budget. Sign up for our free budget app EveryDollar today.