Last year I received a frenzied call from a client asking me how quickly he could receive money from his retirement account. I asked, “What is the emergency, what came up?” The gentleman replied that he had the opportunity of a lifetime to buy a Harley Davidson motorcycle at a deep discount and that he could not pass it up.
Emergencies come in different flavors and what one person considers an emergency, may be a routine event for someone else. Below are some difficult life events that I would consider real financial emergencies and under these circumstances ok to dip into an emergency fund.
1. Loss of Income
An unplanned loss of income is a financial emergency that can sink your financial boat if you are not adequately prepared. The possibility of losing your income is one of the leading reasons why it is important to establish an emergency fund. If you or a spouse has lost a job or had a serious reduction in income, this is a financial emergency and it is ok to dip into your emergency fund.
2. Unexpected Major Car Repair
For those of us who do not live in a city where mass transit is readily available, having reliable transportation is not a luxury, but a necessity. Automobiles break down and the costs to repair them can be pricey. If not having a means of transportation would limit your ability to work, this would fall under the umbrella of a financial emergency and it is, again, one of the reasons you establish an emergency fund.
3. Housing Repair
There are two classifications of home repair: Essential and non-essential. While an upgraded kitchen may make for a nice home improvement, it is not what I would consider an essential home repair and warrant dipping into your emergency fund. Repairs that are essential to keeping your home in working condition such as fixing a roof, a furnace or hot water tank are the types of repairs that need immediate attention. Only consider tapping your emergency fund if your home repair is essential.
4. Health & Dental Care
This category is one that comes down to one’s own preference of what is important for healthy living. As an example, if you are experiencing a financial hardship I would suggest postponing a teeth whitening treatment. However, if you have a medical or dental situation that you feel could or should not be postponed, than let common sense prevail and dip into your emergency fund.
5. Basic Needs
Items for everyday survival such as food, clothing or shelter are essential and a non-debatable need. Those being stated, if you are in a financial crisis, buy only the true essentials and limit non-essential foods or clothing that you do not need to exist.
Consider any purchase you make carefully when you are in a financial pinch and determine if it is an essential need or simply a want before withdrawing your emergency funds to pay for it.