by Tom Geoffroy

Created on: July 18, 2010

To paraphrase an ancient script, we should consider the ant who works diligently in the summer of their life in order to have something in the barren, stark times of winter. In other words, we need to put aside resources when we earn them in order to survive in times when we are unable to earn for one reason or another. Each person should have a "storehouse" of supply ready for times of famine. In modern terms this would be the financial planners much talked about "Emergency Fund." To have an emergency fund is a given, the bigger question is; what constitutes an emergency? Here are five things to consider when determining what a true emergency is.

1.) Loss of job

Losing a job or primary source of income is a major reason to dip into the emergency fund. It matters not if the general economy is good or bad. If you have lost your job it is critical you have funds to continue to meet your basic most important financial obligations. Food, rent/mortgage payments, car maintenance, utility bills, property taxes all fall into the mandatory category. If these things are not kept current, you will have an even greater emergency to deal with.

2.) Sudden illness or accident

Medical emergencies can turn into financial emergencies if you are kept out of work for an extended period of time. You may have health coverage, but your income may be drastically reduced if you are on short term or long term disability. This would be a good time to access an emergency fund to supplement lost or reduced income.

3.) Natural disasters

Falling victim to natural or man made disasters like forest fires, floods, tornadoes, hurricanes, earthquakes, or oil spills can have devastating effects on a person's ability to earn money. An emergency fund is just the thing to get you through. Having the ability to care for your immediate financial needs will go a long way to reducing stress in a very stressful situation.

4.) Death of a loved one

When a person close to you dies, grief is a natural reaction. If that person is the major bread winner in the home it can be emotionally and financially devastating. The loss of a child or parent is extremely difficult too. During times of grief it is hard to concentrate on anything but the sorrow of losing someone you love. Grief takes time to work through and if you have an emergency fund available, you will be better able to deal with the stages of grief and not have the added burden of dealing with the loss of finances as well.

5.) Major repairs

Our finances can be crippled by major repairs needed for our homes our cars. Imagine finding mold in your basement caused by a leaky pipe or condensation. The cost to remediate could be in the thousands of dollars. If your car is in an accident and is no longer safe to drive you will need to dip into your emergency funds if insurance does not cover the loss.

Conclusion:

The scenarios listed above are just some of the unforeseen circumstances people face in life. They all meet the litmus test for emergency situations that will trigger the use of an emergency fund. The emergency fund should only be used for true emergencies. Make a point of setting a strict rule when it comes to what is an emergency. If you are prudent in this matter you will rest easy knowing you are always prepared.

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