Having extra money set aside in an emergency fund is among the basic tenets of personal finance.
Financial advisors typically suggest having three to six months’ worth of expenses set aside for unexpected events — more if you’re worried about the security of your job or you have dependents relying on your income, and less if you have a spouse or partner whose income can help carry you through a job loss.
“In financial planning, we talk about needs, wants and wishes,” says James Lee, a financial planner in Saratoga Springs, New York. “The emergency fund is there to make sure you can cover your needs.”
You want to keep your emergency fund in a liquid account where you can access it easily. Lee recommends using a saving account at a local bank. He also suggests keeping some cash in your home that you could use in an emergency when you can’t get to or use an ATM.
When to Tap into Your Emergency Fund
Michael Raimondi, a wealth manager with the Clarus Group, refers to these accounts as “peace of mind (POM) funds,” since they take some of the fear out of stressful situations. But once you’ve built up your POM fund, it can be tough to know what qualifies as a true emergency.
Typically events worthy of using your emergency fund fall into one of two buckets: paying bills during a period of income loss or in the event of an unexpected, essential expense.
[READ: How Your Employer Can Help You Build Emergency Savings.]
To Pay Bills When You’ve Lost Some or All Your Income
Your emergency fund can carry you through employment disruptions so you don’t have to tap into more expensive sources of cash like credit cards or borrowing from your 401(k) account.
“If there is no income coming in from work, you may need to tap the emergency fund to cover necessary living expenses, like housing, groceries, and utility bills,” Lee says.
Examples of such circumstances include:
— You or a spouse get laid off.
— You have an injury or illness that leaves you unable to work.
— Your bonus or commission is smaller than expected.
— Your company cuts your hours.
— You choose to leave a toxic or unhealthy job.
You’re Faced With a Sudden, Unexpected Bill
A second area that might necessitate the use of emergency funds is the unavoidable expenses that pop up without time to prepare. While insurance could cover many of these events, your emergency fund can help you cover your deductible and tide you over until an insurance check arrives. These might include:
— Emergency medical procedures.
— Dental procedures.
— Car repairs.
— Home repairs.
— National disaster costs.
When Not to Use Your Emergency Fund
Unexpected but discretionary expenses are typically not the best way to use emergency funds. You don’t want to use your emergency funds for a destination wedding, for example, or to purchase holiday gifts.
Raimondi suggests asking yourself whether an expense is absolutely necessary before taking money out of an emergency fund.
“And ask yourself whether there might be an opportunity to save for this item instead,” he says. “Is it something that has to happen immediately, or can I plan and save for it?”
[Read: What to Do With Your 401(k) if You Get Laid Off.]
What to Do After You’ve Used Emergency Funds
Once you’ve used your emergency fund, it’s important to have a plan to replace the funds that you’ve removed. That way you’ll won’t find yourself without the cash you need the next time an emergency hits.
Consider setting up an automatic monthly transfer into your emergency fund until it is replenished.
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Good Reasons to Spend Money from Your Emergency Fund originally appeared on usnews.com
