| February 23, 2012

Know when to use your emergency savings

Having an emergency savings account is one of the most common and effective money management strategies individuals can use to protect themselves and their financial health from sudden or unexpected expenses. For individuals living on a limited income or sticking to a tight budget, having sufficient rainy day funds can shield them from being forced to drain their regular savings, making early withdrawals from retirement accounts as well as turning to credit to cover these costs.

A recent Bankrate survey shows that although too few Americans have sufficient emergency savings, some are beginning to make strides. The poll shows the number of adults who have more emergency savings than credit card debt grew to 54 percent, up from 52 percent this same time last year. But for those that have adequate rainy day funds set up, knowing when it’s appropriate to use it can be difficult.

To begin, emergency funds should be devoted solely to emergencies. This means avoiding the urge to dip into the account to pay a higher than usual utility or credit card bill. In addition, emergency money should not be used for impulse purchases, vacation planning or other types of discretionary spending.

In addition, it’s important to distinguish between being financially incapable of paying for an expense and having to make some sacrifices to cover a bill. When it comes to the latter, adults may not want to pick up an extra shift at work or cancel a pricey cable package to cover the costs of a medical bill. But if it helps them avoid dipping into emergency savings, it may be the best way to meet their needs and keep their rainy day fund intact.

In other cases, such as a job loss or significant expense, adults may have to make a more difficult choice. Immediately turning to emergency savings should not be the answer, and adults should seek out all other alternatives to pay for the costs out of pocket. However, this may not always be possible. In these scenarios, individuals may benefit in the long term by trying to keep costs as low as possible and using their emergency savings to cover the difference. Letting go of emergency savings can be difficult, but by sticking to a strict budget and finding other ways to limit spending, adults can get through difficult financial times and begin rebuilding their rainy day fund.

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