If you wish to be financially safe and keep away from bank card debt, you want to have an emergency fund. You must have three to 6 months of residing bills in a high-yield financial savings account the place you’ll be able to entry the cash shortly and simply for those who want it.

As soon as you’ve got saved up an emergency fund, that cash is there so that you can cowl shock bills. However you do not need to drain the fund unnecessarily and have to begin another time constructing it again up.

To be sure that does not occur, finance knowledgeable Dave Ramsey recommends asking your self three key questions earlier than tapping your emergency fund. Here is what they’re and why answering them is so vital.

1. Are you confronted with an sudden expense?

Ramsey says the primary key factor to ask is whether or not the expense is basically sudden, or is it one thing you need to have been conscious of so you might plan for it.

“Seems Christmas occurs the identical time yearly. (It’s Dec. 25.) And that semi-annual automotive insurance coverage cost? Properly, you realize that’s coming too,” Ramsey mentioned. “Should you’re not budgeting forward for these anticipated bills, it’s time to begin. In any other case you’ll be tempted to make use of your emergency fund for one thing that’s not an emergency. It’s simply poor planning.”

Ramsey is correct about this, however the challenge is that when you ought to expect and planning for these bills, not everybody does this once they begin studying learn how to price range. And the fact is, if the insurance coverage is due now and you do not have the cash, that is an emergency.

To keep away from this example, undergo 12 months of bank card statements and look intently at your calendar. Make an inventory of irregular bills you are going to face in the course of the yr — every thing from birthdays and holidays to automotive registrations and inspections and past. Determine how a lot you may must spend on these bills, divide that quantity by 12, create a line merchandise in your price range for them, and save for them all year long.

2. Is the expense important?

Ramsey mentioned the subsequent factor to ask your self is whether or not the acquisition is “completely mandatory.” In different phrases, you do not need to take cash out of an emergency fund for something that could possibly be thought-about a need relatively than a necessity.

And he is completely proper on this. Your emergency fund actually must be there for you in case you end up in a dire scenario reminiscent of a job loss or medical ailment. You do not need to face an actual emergency and end up regretting that you simply took the cash out for a last-minute spa day that your buddy requested you to go on when you did not have the cash to pay for it.

To find out if an expense is important or not, ask your self in case your well being or long-term monetary scenario will likely be worse for those who do not spend the cash. If the reply is sure, then take the money out of your emergency fund. If the reply isn’t any, then go away the cash the place it’s till you really want it.

3. Is the expense pressing?

Lastly, Ramsey mentioned to ask your self whether or not no matter you are planning on doing along with your emergency cash is pressing or not.

“Ever had an employer who mentioned every thing in your to-do listing was pressing? Or been round a child who wanted every thing proper now? It is exhausting. And for those who dwell with that perspective about your spending, you’ll quickly exhaust your emergency fund,” Ramsey warned. “Don’t. Do. That. As an alternative, keep away from impulse buys and follow the artwork of endurance at any time when potential.”

This recommendation is spot-on as properly. If you do not want to make the acquisition instantly, put it off till you’ll be able to save for it. By ready till you’ll be able to afford the merchandise with out raiding your emergency fund, you may guarantee the acquisition you make now does not trigger you not to have the ability to purchase one thing you actually want in a while.