If you wish to be financially safe and keep away from bank card debt, you want to have an emergency fund. It’s best to have three to 6 months of residing bills in a high-yield financial savings account the place you possibly can entry the cash shortly and simply if you happen to 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 start out yet again constructing it again up.

To ensure that would not occur, finance skilled 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 necessary.

1. Are you confronted with an surprising expense?

Ramsey says the primary key factor to ask is whether or not the expense is admittedly surprising, or is it one thing it is best to have been conscious of so you would plan for it.

“Seems Christmas occurs the identical time yearly. (It’s Dec. 25.) And that semi-annual automobile insurance coverage fee? Effectively, you realize that’s coming too,” Ramsey mentioned. “If you happen to’re not budgeting forward for these anticipated bills, it’s time to start out. 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 true about this, however the concern is that when you ought to expect and planning for these bills, not everybody does this once they begin studying how you can funds. 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 carefully at your calendar. Make a listing of irregular bills you are going to face in the course of the yr — all the pieces from birthdays and holidays to automobile registrations and inspections and past. Work out how a lot you will have to spend on these bills, divide that quantity by 12, create a line merchandise in your funds 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 essential.” In different phrases, you don’t want to take cash out of an emergency fund for something that might be thought of a need reasonably 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 state of affairs 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 state of affairs will likely be worse if you happen to 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 actually need it.

3. Is the expense pressing?

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

“Ever had an employer who mentioned all the pieces in your to-do listing was pressing? Or been round a child who wanted all the pieces proper now? It is exhausting. And if you happen to dwell with that perspective about your spending, you’ll quickly exhaust your emergency fund,” Ramsey warned. “Don’t. Do. That. As a substitute, keep away from impulse buys and apply the artwork of persistence every time doable.”

This recommendation is spot-on as effectively. 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 possibly can afford the merchandise with out raiding your emergency fund, you will guarantee the acquisition you make now would not trigger you not to have the ability to purchase one thing you actually want afterward.