Having money set aside in an emergency fund is among the basic tenets of personal finance.
Financial advisors typically suggest saving three to six months’ worth of expenses — 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.”
When to Tap Into Your Emergency Fund
Michael Raimondi, a wealth manager with the Clarus Group in New York, 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.
“While you shouldn’t dip into your emergency fund for just anything, don’t be afraid to use that money when you need it — it’s called an emergency fund for a reason,” wrote Mark Henry, founder and CEO of Alloy Wealth Management, in an email.
Events worthy of using your emergency fund generally fall into one of two buckets: paying bills during a period of income loss or covering unexpected, essential expenses. Here are 10 good reasons to use that money:
[READ: How Your Employer Can Help You Build Emergency Savings.]
1. 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:
1. You or a spouse get laid off.
2. You have an injury or illness that leaves you unable to work.
3. Your bonus or commission is smaller than expected.
4. Your company cuts your hours.
5. You choose to leave a toxic or unhealthy job.
2. You’re Faced With a Sudden, Unexpected Bill
A second area that might necessitate the use of your emergency funds is when unavoidable expenses pop up unexpectedly. These might include:
6. Emergencymedical procedures.
7. Dental procedures.
8. Car repairs.
9. Home repairs.
10. National disaster costs.
[Related:What to Know About Taxes After a Disaster]
“When you’re faced with a stressful situation, your emergency fund is there to cover the costs so you can spend less time worrying about money and more time focusing on what’s important, like problem-solving and time with loved ones,” Henry said.
While insurance may cover some of these events, your emergency fund can cover your deductible and tide you over until an insurance check arrives.
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.
[Related:Fun Ways to Save on Holiday Shopping]
Raimondi suggests asking yourself whether an expense is absolutely necessary before taking money out of an emergency fund.
“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?”
Also, consider if you can lower your expenses to open up more income.
“If you’re struggling to make ends meet but don’t need money immediately to pay a bill or purchase necessities, ask yourself if there are any other places you can cut costs before pulling from your emergency fund,” Henry said.
He suggested canceling subscriptions you don’t need, shopping at a cheaper grocery store or decreasing your “wants” budget.
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 spent. That way you won’t find yourself without the cash you need the next time an emergency hits.
“As you handle the situation you needed that money for, start working to replenish those funds. Even if you can only contribute a little bit at a time, that will add up,” Henry said.
Consider setting up an automatic monthly transfer into your emergency fund until it is replenished, cutting discretionary costs to contribute more and taking advantage of elevated rates on high-yield savings accounts.
“High-yield accounts generate 4% to 5% interest on average, compared to less than 1% in traditional savings accounts,” Henry said.
Soon, your emergency fund will be restocked and in good shape to protect you against whatever life may throw your way in the future.
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10 Good Reasons to Spend Money from Your Emergency Fund originally appeared on usnews.com
Update 11/26/24: This story was previously published at an earlier date and has been updated with new information.
