Would you say it’s safe to use your emergency funds to pay off credit card debt? Many would see this as insane, unheard of, or outright unwise. Who would presently touch their emergency funds when it will come in handy if you need it the most in future?
First Things First
There is no way you can talk about an emergency fund when you don’t have one to begin with. It’s important to set aside funds that will come in handy during those rainy days; which can be paying off medical bills, buying groceries, paying your rent and so on. But the sad truth is that not everyone holds an emergency account in this day and age.
We are blinded by our current steady paychecks and benefits like medical, car, house and education insurance. Somehow we are deluded that everything is taken care of and that we will never have to think of a financial backup plan. Until we lose that job due to a recession or get into that accident that robs us the ability to work again, or yet until we lose the only place we call home to a hurricane or a foreclosure.
If you don’t already have an emergency financial kitty, stop wasting time. Start putting away a portion of your income into this private account that you never get to touch. Ideally, your backup financial account should be able to comfortably cater for your needs for the next three to six months without any regular paycheck coming in.
So When Is It Safe To Withdraw From The Rainy Day Account?
The old saying that one man’s meat is another man’s poison becomes more relevant in this scenario. We all define an emergency differently, and what may be a dire financial situation for one person may not be necessarily the same for another. However, we can all come to an agreement that an emergency account remains untouched until when we truly need it, and such a situation is where a problem arises that demands of us financially to solve it, often a problem which our current paycheck cannot fully cater
The only time to use your emergency account to make payments is when we foresee a beneficial outcome from our action. You also only touch your cash buffer only when you have assessed all the risks involved and you are certain you can comfortably cushion them. So if you are up in arrears on your IRA contribution, that’s a financial emergency you can cater with your backup account. If you need to pay the debt on your credit cards, finance the last portion of your mortgage payments or fix a car that you truly need in your daily commutes, then your emergency account should come in handy.
On the other hand, your emergency account is not meant for financing that lavish holiday tour to an exotic place. It certainly isn’t for upgrading to the latest 55 inch TV screen or the latest smartphone in the market. If there is no tangible return on investment on what you spend on, then you are depleting your rainy-day account for all the wrong reasons.
When risks and rewards of using your emergency funds are clear, then you have the green light you need. The insurance and employment benefits you receive are great, but they aren’t enough security. In the current economy where companies are laying people off right left and center, you cannot afford to play with the hand of fate. What if you became redundant in the next minute? Do you have enough to keep you going until you can secure another job? What if you don’t get a new job in the next two or three months, how are you going to survive that period? By the way, the best way to describe job security isn’t how safe you feel in your current job but how easy it is to find another job when you lose the current one.
Then again, here is something else to think about. What’s the point of having money lying around when it is earning you 0% in interest? Why should you have this kind of money lying around idle while on the other side you are furnishing a 24% interest loan? The numbers don’t add up, and it definitely wouldn’t make the slightest sense to any experienced investor out there. Your current finances should be making more money for you and not make you sink into deeper financial hurdles. Furthermore, money loses value by the hour and what you deposit today will most certainly not be what you withdraw in the near future; if you don’t do anything about it right now.
Remember, if you can weigh in the risks and rewards and you see it wise to make a financial move, then make that withdrawal. How about if you put some of that money into an investment plan that involves equities, indices or the currency market? Why not open a trading account with any of the online investment traders like CMC markets and see how the odds can work for you, in terms of growing your coffers. Having an emergency funding account is a good thing but having an account that earns you interests or rakes in a certain amount each month is a true and secure investment for your future.
So your emergency funding account doesn’t have to be static; money can move in and out with the assurance of a profit each month. And you can use the profits to fund whatever financial hurdle you are in while the rest of the kitty is invested in more opportunities. It is really a simple formula for success but not many people will abide by it; that’s why we only have few people growing rich each day.
The game plan is simple and clear: set up an emergency account that can cater to your needs for the next six months. Then find ways to grow that money instead of letting it sit idle; the stock market is one place you can start.