It's officially the holiday season and people are starting to hit the stores for their annual holiday shopping. With many American's still out of work, or experiencing prolonged economic struggles, some families may be tempted to dip into their emergency fund to pay for their holiday expenses. Is this a good idea or a financial mistake?
Probably there is no one-answer-fits-all solution to this situation. If you have the cash flow to pay for your living expenses and pay for your holiday necessities – by all means, you should use the cash and avoid pulling money from your emergency fund. For others who maybe don't have any breathing room in their monthly budget to afford the additional expenses of the holiday season, an emergency fund may be a viable option to avoid going into debt. You'll need to weigh the pros and cons of your unique situation carefully to make your decision.
Advantages of Using Emergency Fund for the Holidays
Using your emergency savings means you don't have to rely on credit cards if you were unable to save money in advance for your holiday expenses. Credit cards have much higher interest rates than the interest you'll lose from withdrawing the savings – especially if you know you'll be unable to pay the credit cards back in full within the first billing cycle. Don't be fooled by retailer credit cards with 0% promotional rates or discounts on that day's purchase – if you are late with one payment, your interest rate is going to shoot up to an average of 29% making your holiday purchases cost far more than you intended.
Using the emergency fund to purchase your holiday gifts or pay for your holiday travel means you can pay for it all at once, and then pay yourself back (instead of the credit card companies). You could even pay your emergency fund back with a reasonable interest rate in order to rebuild and grow your emergency fund larger than it was before you borrowed from it.
If you don't have access to credit cards and did not have the means to save money for the holiday season – using the emergency fund may be the only way to ensure you have presents for family members. While the holiday is not about the gifts, if you have young children who believe in Santa a giftless holiday season can ruin the magic.
Disadvantages of Using Emergency Fund for the Holidays
If you pull your emergency savings for the holidays and a financial emergency comes up before you've had opportunity to re-establish the account, you'll be forced to rely on credit cards or borrowing from another source to pay for the emergency.
Withdrawing money from an emergency fund means you'll lose out on any interest that money may have earned for you until it's paid back.
While paying yourself back is preferable over paying high interest to credit card companies – it's still an expense. Because it's just paying yourself back, you may find it difficult to remain committed to making payments to your emergency fund and end up never replacing the money you use for the holidays.