Life is full of uncertainties, and the only way to manage these uncertainties is to prepare mentally and financially. An important aspect of ensuring financial preparedness for the future is setting up a large emergency fund that you can withdraw in case of an emergency.
But building an emergency fund in itself is not enough. You should also know when is the best time to use it so that you have enough money to come back when you need it. Therefore, you should have a clear idea of the specific circumstances that may be considered emergencies that require the use of an emergency fund. In this blog, we will discuss 4 situations when you should use your emergency fund.
Reason 1: To meet financial obligations arising out of job loss
The COVID-19 pandemic lockdown and its subsequent economic impact has affected our lives in many ways, including financially. While some of us have lost our jobs or had to close our businesses, many others have seen a sharp drop in income or have had to take unpaid leave for extended periods. Job loss or closure is one situation when you must use your emergency fund.
Unless you have an alternative source of income to meet your financial obligations, the only option is to use your emergency fund. However, if your income has decreased, it is better to try to adjust your current budget by reducing expenses wherever possible. While this may be difficult, it will enable you to meet your financial obligations, as well as ensure that your emergency fund remains intact in case of future emergencies.
Reason 2: For medical expenses not covered by health insurance
It’s important to plan for medical emergencies ahead of time to maintain your financial health and make extensive purchases. Health Insurance Plan The best way to do this. However, health plans have their limits, and you may have to pay out of pocket if your insurer doesn’t cover specific treatments. Your health insurance may not cover various outpatient procedures such as dental procedures such as root canal surgery, treatments for pre-existing conditions, and treatment of fractures.
The cost of some of these treatments can be high, and you have no choice but to pay for them yourself. While you can opt for a personal loan to meet such expenses, it is a better option to use your emergency fund to cover such expenses. By using your emergency fund for these expenses, you do not have to worry about interest charges and future EMI payments that may arise from taking out additional loans.
Let’s consider what the interest charges of a personal loan might look like. If you take a personal loan of Rs 1 lakh for 3 years @ 16% per annum, your monthly EMI will be Rs 3516. Therefore, the total interest you will pay for the loan will be Rs 26,525. Additionally, you have to pay processing fee, CIBIL fee, documentation fee on top of interest. If you decide to use your emergency fund to meet medical expenses that your insurer does not cover, then you need not worry about interest cost or future EMI burden.
Reason 3: To cover expenses related to emergency home repairs
Every property we own requires repair and maintenance from time to time, but sometimes, emergency repairs to your home may be necessary due to fire damage or water damage. While home insurance may cover these expenses, your insurance plan may have specific exclusion clauses that result in out-of-pocket costs.
The bills for this type of emergency repair can be very high, and you may not have enough cash available to pay for it unless you take out a loan or use your emergency funds. In this case, it makes sense to use your emergency fund instead of taking on additional debt. Not only will it cost you less in the long run, but you also won’t have to wait for your loan to be approved to meet the cost of repairs.
Reason 4: To cover emergency travel expenses
Maybe you have moved away from your parents and family in connection with work. While we may try our best to stay in touch and plan visits once or twice a year, there is always the possibility of last-minute travel when a family emergency arises. Last minute emergency travel tickets can be quite expensive whether we are traveling domestically or internationally. Last-minute return air tickets for a family of 4 can easily cost lakhs of rupees. In such cases, using your emergency fund to take care of the expenses is the right call. While you can always use a credit card to make initial purchases, using your emergency fund to pay bills later will save you a significant amount in interest charges.
It is logical to use your emergency fund only when there is a real emergency to ensure that you do not run out of funds when you finally need it. But beyond that, you also need to consider another factor – refilling your emergency fund after it has been used up. To stay safe, you need to make sure you have enough emergency funds to cover your expenses for a period of 9 to 12 months. Otherwise, you risk falling short when there is a real emergency, and that would defeat the whole purpose of having an emergency fund in the first place.