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When life gets turned upside down, it can feel like your finances are in free fall. Having an emergency fund can be a lifesaver. When you have access to emergency savings, you can avoid racking up credit card debt or cashing out retirement accounts to pay the bills. Still, it’s wise to carefully consider your options and use caution before tapping into your emergency fund.
Here are some factors to consider when making a decision about using your emergency savings:
1. CHECK YOUR EMERGENCY SAVINGS. How much money do you have saved? Experts recommend saving three to six months’ worth of living expenses in a savings account for emergencies. Think about how you might stretch your emergency savings to last for a longer period of time, if needed.
2. ASSESS YOUR SITUATION. Is it a true emergency? Hold off on using your emergency savings until you really need it. If you still have money coming in, and you can make ends meet by adjusting your spending, you could leave your emergency savings in place.
3. LOOK FOR FINANCIAL RELIEF. If you’re out of work, do you qualify for unemployment benefits or paid leave policies through your employer? Are you eligible for a mortgage refinance, loan modification, or forbearance program to temporarily suspend payments? Evaluate all of the benefits available to you before dipping into your own savings, and do what is financially right for you.
4. REVIEW YOUR SPENDING. Are you spending money on things that are nice to have, but not essential? Look for ways to cut back on discretionary spending. If you’re staying home, you may find that you’re spending less on transportation and going out – and you may not need to raid your emergency savings after all.
5. POSTPONE PURCHASES. Can you hold off on big purchases for a while? Make a list of upcoming large expenses and consider if any of these purchases can be postponed. If you can get by with what you have today, you’ll have more money to cover day-to-day expenses until your situation improves.
6. REPLENISH SAVINGS. What happens after you spend your savings? When you’re in the middle of an emergency, it can be difficult to think about replenishing your emergency savings fund. But it’s important to keep this in mind and have a plan to rebuild your savings so the money will be there the next time you need it. If you receive a tax refund or other additional income, consider putting this toward rebuilding your emergency fund.