Although an emergency fund is for well… emergencies, it is easy to be tempted to dip into it to buy something that we should save up and pay cash for. Depending on where we keep our emergency fund, we may be more likely to succumb to temptation. That is why a money market account is the ideal place to keep our emergency fund. It is accessible, but we may have to write a check. The act of writing a check may cause us to think for a moment to ask these 3 questions.
Question #1
Is this a want or a need? If it’s a need, then using the emergency fund is allowed. But if it’s a want, then we should save up and pay cash.
Let’s say our hot water heater quits working. We need hot water to take showers, wash dishes, and do laundry. And the hot water heater is almost $2000 to purchase and have installed by a good plumber. We may even have to pay a rush charge. This definitely qualifies as a need.
But if we decide we want to upgrade our gaming system to the new Nintendo Switch console, that’s a want. Suffering with our old Nintendo Game Cube is not an emergency. Save up and pay cash. Leave the emergency fund alone.
Question #2
Can we delay purchase? Let’s say we have a legitimate need. It’s important, but it isn’t urgent. An example would be paying our $250 deductible to replace our windshield that just got cracked driving to grandmother’s house for Thanksgiving. The car runs, and we can still see since it is just a crack. Even though windshield cracks eventually spread, we could probably wait. And this leads us to…
Question #3
Can we cash flow it? In the example above, $250 is not a super huge amount of money to cash flow over a few pay periods. Essentially, this enables us to save up an pay cash.
What emergency fund question do you have?