If you’ve paid off debt – or even if you haven’t, but are working towards it – then many financial planners recommend that you also keep both a savings account and some kind of emergency fund. But what happens if your car needs a sudden, expensive repair, and you have to have your car to be able to get to your job? Where should you pay this bill from – your savings account or your emergency funds?
The thing is, there’s a pretty big gray area between what constitutes something you’ve saved for and what’s really an emergency. Every advisor you ask will give you a slightly different answer on how to use these kinds of money sources.
A key point, especially in these uncertain economic times, is to make sure that your emergency funds will be able to carry you through a few months if you lose your job or have an accident or illness that prevents you from working. That’s why you don’t want to start using your emergency funds until you really, really have to.
So what kind of purchases could be made out of your savings account then? Well, these should be goods or experiences that you’ve intentionally been putting money aside for, including college expenses, vacations, a new computer, investment in stocks or shares, or furniture, just to name a few. And if you need a sudden car repair: perhaps the better way is to dip in to your savings funds, and then just save a little longer for the items you’d hoped to get. That way your emergency fund is still ready for a true emergency.
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