Should you use your emergency fund during the COVID-19 outbreak?
COVID-19 has caused financial disaster on millions of Americans.
Already, 30% of Americans have called on their emergency fund because of the economic effects of the Coronavirus pandemic, according to a recent NerdWallet survey conducted online by The Harris Poll from April 8-10.
And just as the coronavirus has affected people of all ages, it has left people of all generations to rely on their savings. Some 45% of millennials have used their emergency fund due to the economic impact of the pandemic, with 36% of Generation Z adults, 32% of Generation X and 16% of Baby Boomers, according to the survey.
The purpose of emergency funds
Emergency funds are designed to help you get through temporary financial difficulties, such as job loss. This is why experts often recommend filling your fund with enough money to cover. three to six months expenses (food, shelter, drugs, utilities and others).
“The purpose of the emergency fund is to use it in an emergency,” says Dana Menard, certified financial planner and founder of Twin Cities Wealth Strategies Inc. in Minnesota.
This means that you shouldn’t be afraid to use it when you really need it – which it could be right now.
“It’s crazy to think about saving for an emergency and then not using it at all, and going back to the old ways of withdrawing the credit card or anything like that that could be more damaging,” he said. “The purpose of building up that cash reserve is to allow you to cover all of your fixed monthly expenses when times get tough.”
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When to use your emergency fund
The mere thought of leveraging your savings for a rainy day can be scary. But it’s often a better option than going into debt, says Christopher Wells, CFP, founder of Flourish Financial Planning in Texas.
Still, you want to make the decision thoughtfully. So how can you really tell if it’s time for you to use your emergency fund? It depends.
First, use the financial tools at your disposal. Recently dismissed? File for unemployment benefits. Afraid of falling behind on your rent or mortgage? Menard says being proactive is crucial. Contact your bank, lender, or landlord and let them know about your situation instead of waiting for them to contact you. You may discover relief options that you didn’t know about.
Then make sure you live as simply as possible. If you are in a closed area or have stay-at-home restrictions, it’s relatively easy to stop spending on entertainment and meals.
For all other purchases, ask yourself two questions before you buy, advises Wells. First, is the article a necessity? And second, can you delay the purchase? This should help you reduce the amount you are spending at the moment.
Also be strategic with your needs, suggests Maddi Napier, CFP, founder of Minerva Wealth Planning LLC in Ohio. For example, Napier says to look for inexpensive food items that last. Focusing on staples like rice and beans can save you money on groceries.
If after taking all of these steps you still can’t afford the necessities, it’s probably time to use your emergency cash.
What to do if you don’t have emergency funds
But emergency funds aren’t always an option for everyone. Nearly one in five Americans (18%) don’t have emergency funds to get started, according to the NerdWallet survey.
And sometimes emergency funds are not even enough. For households with two people who experience a loss of income, emergency funds may not be as much of a cushion as expected.
If you don’t have a lot or no funds available, you should still follow the checklist above – but you’ll probably want to do even more.
For example, if you’re expecting a tax refund this year, Menard says you might want to file your return earlier so you can get that money back sooner. Napier recommends taking overtime at work if you’re still employed, or looking for companies that are hiring during the pandemic.
Whatever your specific financial situation, be prepared for COVID-19 and its financial implications to last for some time. Take as many steps as possible now to protect your finances for the months to come.
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Harris survey methodology
This survey was conducted online in the United States by The Harris Poll on behalf of NerdWallet from April 8 to 10, 2020, among 2,042 American adults aged 18 and over. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For a complete survey methodology, including weights variables and subgroup sample sizes, please contact Madison Gouveia at [email protected].