No matter how well we prepare, we will be faced periodically with emergency expenses. This is why it is important to establish an emergency funds account as well as other accounts for designated purposes. It usually takes time to build a decent emergency account and when we are presented with an emergency for which to use that money, making that decision can be difficult for many of us. Losing savings that took a while to build can have a negative impact on our motivation as it relates to saving. So how do we handle tapping into our emergency funds?
One of the first things we should do is determine as best as we can, what constitutes an emergency expense. Since emergencies are typically unknown until they happen, it is easier to determine what should NOT be considered emergency expenses. Nevertheless, while we may be able to agree on some of the things that should be considered emergencies, there are others where the line gets blurred, so I will leave that as a personal decision. However, it should be noted that the more flexible one’s criteria for determining an emergency expense, the more money one needs to have set aside to accommodate the possibility such expenditures.
When an emergency expense arises that forces us to tap into the account, we should not be too hard on ourselves about doing so because after all, such funds are designed to make our lives easier. However, I believe we should be tough on ourselves with regards to how soon we should put that money back. We should regard money taken from such accounts the same as a loan and make every effort to pay it back as soon as possible. I would go as far as saying to include interest in what we’re paying back to the account. After all, we are paying back ourselves so why skimp?
Additionally, we should establish terms that are as strict as if we were taking a loan from a bank. If one is still building an emergency account, then figure out the terms where he can add additional money to the account to replace what was taken as soon as possible, while the amount he is already contributing would continue its course. If he is fortunate to have reached his goal for the emergency account, then try putting it back in a shorter time than it took for him to build it in the first place.
Finally, institutions tend to give discounts to customers who enroll in automatic billing. I do not think it is because they care for us so much, but because they want some sort of guarantee that they will be paid on time, as opposed to them relying on our whims, discipline or memory to pay. So, we should arrange the same for ourselves. Therefore, along with making our savings automatic as mentioned before, when we are paying ourselves back for a ‘loan’ that we took from one of our accounts, make the payments automatic as well.