When Should I Spend My Emergency Fund?
As the name implies, you should only spend your emergency fund on serious emergencies. Of course, what constitutes as an emergency may differ from person to person. To determine if one of my customers truly has an emergency expense, I typically ask them three questions: Is it necessary? It is unexpected? And is it urgent? If they answer yes to these questions, it generally makes sense for them to pay for the expense using their emergency fund.
Spending your emergency fund on necessary expenses
Necessary expenses include housing, food and transportation. After sudden job loss, you may find yourself unable to cover these costs. While I tell my customers the necessary expenses that fall into these four categories generally warrant spending their emergency fund, I also tell them to first try to cut down on these expenses as much as possible.
Especially if you believe your unemployment (or other reason for your inability to cover expenses) may be prolonged, try to find lower-cost housing, lower-cost transportation methods and cut down on unnecessary food purchases – such as eating out – if possible.
Spending your emergency fund on unexpected expenses
You should always budget for regular expenses, such as housing, food, transportation, and home and car maintenance. However, as we all know, unexpected emergencies do arise. These include car accidents, health issues, large home repairs and unplanned, essential travel. These types of unexpected expenses are another reason you have an emergency fund.
Spending your emergency fund on urgent expenses
It’s also generally acceptable to use your emergency fund for urgent expenses that cannot be paid for at a later time, as long as the expense is also necessary and unexpected. Examples include plumbing issues or a furnace that suddenly breaks down during winter.
If you can make unexpected or necessary costs less urgent by receiving an extension on a bill or finding alternatives to the purchases, you may consider doing so before spending your emergency fund.
For example, if you are experiencing prolonged job loss and a totaled car after an accident, consider putting off the expense of buying a new car by using public transportation or another low-cost form of transportation until you have regular income coming in again.
Rebuild your fund afterward
It’s important to rebuild your emergency fund as soon as possible. That way, it’s available the next time you need it. A general rule of thumb is to save equal to about six months-worth of your take-home pay, so be sure to replenish your fund to at least that amount. Find more tips on building an emergency fund in our previous article.