When is it okay to use your emergency fund?

by Colin Lalley
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When is it okay to use your emergency fund?

Updated September 16, 2020 Emergencies are more common than you think and many people are one situation away from financial disaster — about six in 10 Americans can't cover a $1,000 emergency with savings. In some cases, savers will dip into their retirement accounts to cover a crisis, which triggers taxes and penalties in the short term and hinders growth in the long term.

Personal finance wisdom encourages you to build an emergency fund of three-to-six months' worth of expenses (or more) to avoid this very problem. But once you have the cash, when do you use it? What should you consider an emergency?

When it comes to using your emergency fund, you should ask yourself what situations are truly unexpected and urgent, and strive to only use it in cases of job loss, health emergencies and unexpected and absolutely necessary home repairs.

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When you should use your emergency fund

You should try to use your emergency fund as little as possible – hence the "emergency" – but there are a few times when you won’t have any other choice and it’s worth pulling from your emergency fund to keep the situation from spiraling out of control.

Here are five things to look for in an emergency fund.

Job loss

This is one of the primary purposes of an emergency fund. If you lose your job and need to go on the hunt, can you keep paying your mortgage, credit card bills, and other essential parts of your life in the meantime?

Here's a guide to navigating job loss during COVID-19.

Using your emergency fund means you can focus on finding another job without worrying about how you’ll make ends meet for your family. Depending on how confident you are in your ability to find a new job and your risk aversion, some experts suggest 8-12 months to give yourself that much more of a cushion.

We have a guide to building a 12-month emergency fund here.

An emergency fund can also help if you still have your job but can’t work. Even if you have disability insurance, that might only pay 50-70% of your normal income; an emergency fund can help fill that gap and supplement your insurance benefits.

Health emergencies

Health insurance is great at covering some medical emergencies, but that doesn't mean you're completely in the clear. In fact, medical debt is one of the most damaging and common forms of debt out there, even for those with coverage.

You’ll have to pay the deductible before your insurance will kick in, and depending on your plan and the procedure, you could be out a few hundred (or even thousand) dollars before your insurer begins to cover anything. What's more, you may also get stuck with an additional massive medical bill from out-of-network care. In a health emergency, it's unlikely you're checking that every doctor and procedure you receive is in-network, leading to surprise debt.

If you do find yourself facing a steep bill, there are some steps you can take to handle it without needing to use your emergency fund. For example, look for common billing errors to make sure you aren’t being overcharged, and see if the hospital will work out a payment plan so you don’t have to pay the entire bill at once.

Unexpected repairs

There are two indispensable items in your life that are worth spending your emergency fund on to repair: your car and your home.

There are obviously some issues that are more pressing than others: A leaky faucet or a drafty window might not be as dire as a burst pipe. But if your home has a serious accident – a storm knocks a tree onto your roof, for instance, or your walls have a bad case of mold – or if you can’t use your car anymore and you rely on it to get to your job, you should use your emergency fund to pay for repairs.

Depending on the repairs needed, auto insurance or homeowners insurance can help cover the costs, but just like health insurance, you might use your emergency fund to help cover the deductible until your insurer actually takes over.

Questions to ask about your emergency fund

Here are three questions you should ask when you’re considering using an emergency fund:

  • Is it unexpected? A layoff or medical emergency is unexpected. You overspending on Christmas gifts isn’t.

  • Is it absolutely necessary? Your car breaking down is absolutely necessary. A home renovation because you think the yellow of your kitchen tiles is ugly isn’t.

  • Is it urgent? Did your furnace die in the middle of winter? That’s urgent. Is someone having a sale and you want to replace your not-broken washing machine? That’s not urgent.

The scenarios we outlined above are pretty tried-and-true situations for using your emergency fund, but asking yourself these three questions can help you decide if something is emergency-worthy, no matter the scenario.

Avoid using your emergency fund when you can

There are a lot of "what if" feelings that come with using your emergency fund. Even if you answer yes to the questions above, what if an even bigger emergency comes along before you’re able to replenish your fund? The easiest way to avoid this is by not using your emergency fund at all – and still being able to cover your expenses.

First, budget and save accordingly. Set up automatic payments for regular expenses like bills and loan payments, and plan far enough ahead so you aren’t scrambling to pay for a vacation or other known expenses.

Also make sure you have the right insurance in place. Whether it’s disability, auto, renters, or health, insurance is an important part of any financial safety net. While you’ll still be responsible for some of the costs, insurance can help defray them and keep your emergency fund use to a minimum.

So there you have it – an outline of when it’s okay to use your emergency fund. If you were thinking of dipping into it for those Beyonce tickets, it might be time to reconsider. But now that you know the questions to ask, you’ll be able to tackle any emergency that arises with confidence.

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Image: H. Armstrong Roberts