What constitutes a financial emergency?

emergencyWe all know it’s important to have an Emergency Fund, but how do we know what really constitutes an emergency? An emergency would be something that cannot be planned for or expected. An unexpected loss of income, for example, would be an emergency. Normal maintenance or repairs for your car, however, would not be.

Within your balanced spending plan you should be including periodic spending such as auto maintenance, home repairs, etc. When planning the amount of the allocation to these spending envelopes, be sure to take into account the age of your home, car, and appliances.

If you drive a 10 year old car, you will want to plan accordingly for repairs, and you may also want to be saving for a new car. New brakes, oil changes, new tires, and other maintenance all should be planned for and expected. These are not emergencies and you do not want to deplete your emergency fund to pay for them; otherwise you may be jeopardizing your ability to handle a true emergency should one occur.

While you may not be able to plan for a broken pipe or a broken refrigerator, you can work to set aside funds for home repairs and maintenance. This would include repairs, maintenance or replacement of the furnace, air conditioner, appliances, lawn mower, sprinklers, etc. Think about the age and wear on your home and appliances and try to plan accordingly when estimating the amount of money to allocate within your spending plan for home maintenance each year, or month. However, if you wake up one morning and your kitchen is flooded, you may need to use some of your emergency fund. Just be sure to replenish the funds as soon as possible.

To determine the amount that should be in your emergency fund, total your monthly expenses and then multiply by the number of months that you want to be able to cover should you lose your income. If your expenses are $4000 per month, you should work to build an emergency fund of at least $12,000 so that you can pay all of your bills and expenses for 3 months. 3 months is the minimum amount that you want to set aside. Most financial experts recommend having funds to cover 6 to 12 months of expenses, and in today’s economic climate, that definitely sounds like wise advice.

– Steve Smith