For most of us, our lives are full of unexpected twists and turns, many of them are unexpected minor issues that need our immediate attention, even when we haven’t planned for them.
If your car breaks down or the washing machine needs repairing, it might be that you need a bit of short-term finance from a service like Moneyboat, to help you pay for the unexpected bill that is coming your way.
You might be someone that likes to put away a bit of cash in a rainy day fund so that you can cope with one of life’s minor emergencies, but if you do have a small amount stashed away, what actually constitutes an emergency, and when should you be raiding your savings to pay a bill?
Defining an emergency expense
It is hard to argue with the observation that if you are able to put a bit of spare cash aside each month into a rainy day fund, this should turn out to be smart strategy, especially when you get hit with an unexpected bill, and have got enough in there to deal with the problem.
The question that is not always that easy to answer, as it tends to be influenced by your attitude to money as well as your general outlook and demeanour, is what do you consider to be a financial emergency?
Some scenarios are blatantly obvious that they are an emergency, such as your plumbing springing a leak and water escaping into your home as a result. Other situations, like deciding that you really need a holiday right now, and “temporarily” using your savings to pay for the trip, with the intent of putting it back shortly afterwards, is not what you could define as a financial emergency.
Unexpected is the key word to focus on
In basic terms, an emergency expense is having to fund the money for something that you simply can’t afford to delay, for whatever reason.
If you are going on holiday or you know that your car will need servicing in the next 12 months, these are events that you can clearly plan for and if you don’t have the cash available to pay for them when the time comes, that is down to poor planning rather than anything else.
Unexpected is the key word to focus on here. If you know something will be becoming due at some point in the future, like a tax bill, or a maintenance charge, these are not unexpected financial expenses, however, when the central heating unexpectedly stops working in the middle of winter and needs repairing immediately, that can be defined as an emergency expense.
The problem for many of us, is that there is a grey area where you sometimes might find it difficult to decide what fits the bill and actually constitutes an emergency.
How important is the financial emergency?
A good way of helping you to make a decision on whether to use any emergency funds that you have accumulated, would be to ask yourself a few pertinent questions, and then make a decision based on your response.
If you are facing an emergency expense that can potentially affect your health if you don’t get it fixed immediately, then that is a no-brainer, but deciding to get your teeth whitened is the sort of issue that can wait until you have the cash in your main bank account, before going ahead.
If you work for yourself, you could justifiably say that if your laptop breaks down or a vital tool needs replacing, this could be classed as a financial emergency, if you needs these items to carry out your work.
Delaying replacing what you need to earn money, will impact on your financial stability, so aim to define how important the repair or replacement is to you and your business, as this should help you decide if the situation warrants being classed as a financial emergency.
Rainy day fund is different
It is worth pointing out that there is a clear distinction between a rainy day fund and a financial emergency fund.
A rainy day fund should be viewed as a long-term savings goal where you are putting money away for your child’s further education needs or maybe to fund a trip that you are planning when you you retire.
A financial emergency fund does what it says on the tin. Understanding the difference between the two types of savings and using them accordingly, will definitely help you to keep a better control of your money.
The important thing to remember is that money can all too easily melt away from your rainy day fund, unless you are disciplined about making that distinction and also how you define what a financial emergency is.
Nicholas Krauspe is the Head of Operations at MoneyBoat.co.uk, a London based alternative finance company providing unsecured consumer credit to residents of the UK. Nicholas has over 10 years of operations and management experience in the consumer finance sector.