Updated: Sep 06, 2023

What Would Be Considered a Financial Emergency?

Now that you've been able to save up for an emergency fund, learn about the different situations when you it makes sense to use that money.
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Building an emergency fund can take months or years of diligent saving. When it comes time to finally use your emergency savings, you may be hesitant to do so.

After all, no one wants to empty their emergency fund and have to spend months or years refilling it. On the other hand, emergencies are exactly what emergency funds are for.

If you can’t pay for the expenses out of your income, your only other option is incurring debt to pay for the unexpected expenses.

Unless the interest rate on your debt is lower than the interest rate you earn on your money set aside, it usually doesn’t make sense to take out debt to pay for an emergency.

So, even though it may be painful, here are a few times when it makes sense to actually use the money you worked hard to put away in your emergency fund instead of using your credit cards.

1. Loss of Income

The most obvious time to use your emergency fund is when you lose your income. With no income coming in, you’ll be forced to either start drawing down your savings or increasing your debt.

Whether you’ve lost your job or the clients you freelance for let you go, this is no time to be ashamed of using your emergency fund during your financial crisis. This is exactly what your emergency fund was made for.

To make drawing down your emergency fund a little less painful, focus on reducing your expenses to only necessities.

Reducing your expenses will also extend the amount of time you can use your emergency fund before it runs out.

Your number one priority should be finding a new source of income. This may require additional expenditures. Even so, additional expenditures used to help secure income is usually a good use of your emergency fund.

2. Threat to Your Income

Another great time to use an emergency fund is when your income is threatened.

For instance, if your car breaks down and it is the way you get back and forth to your job, fixing your car is an emergency.

If you don’t fix the car and can’t get to work, you could easily lose your job which is an even bigger emergency.

While you may be able to use alternative methods of transportation to get back and forth to work, there is no shame in using a portion of your emergency fund to fix your car if your income relies on it.

If you find your income threatened in other ways, it’s probably a good idea to use your emergency fund if it can avoid the threat.

For example, let’s say your cruise got back a day late due to a hurricane and you missed your flight home.

The only option to get home before you’re due back at work is to pay to rent a car and drive through the night, but you don’t have cash in your checking account to pay for the rental.

In this case, paying for a rental car with your emergency fund would be a great use if missing work could result in a threat to your income going forward.

3. Threat to Your Shelter

Shelter is a basic need. If your shelter is threatened, you need to take care of the threat. This can be especially true if you’re a homeowner.

While some repairs and circumstances can wait, there are other repairs and circumstances that need immediate attention. If your shelter needs immediate attention, using your emergency fund is usually the right move.

For instance, let’s say you find out your roof on the home you own is leaking. Upon further investigation, it’s time to replace the roof. Unfortunately, it’s five years earlier than you had planned.

Not fixing the roof would likely lead to significant water damage and other issues that would cost you even more over the long run.

In this case, it likely makes sense to use your emergency fund to at least repair the roof if not replace it altogether.

On the other hand, let’s say your dishwasher breaks in your home. While a dishwasher may seem like a necessity to many families, you can still wash the dishes in the sink.

In this case, skip using your emergency fund and save for a replacement.

4. Threat to Your Health

Your health is one of the most important things. Without good health, life can be very difficult and expensive.

If your health is being threatened, there’s a good chance your income is being threatened, too.

If you have the opportunity to improve your health, whether it be through surgery, treatment or some other expenses, using your emergency fund to do so is probably a good idea.

Keep in mind, elective procedures and long-known health issues aren’t emergencies and should be budgeted for accordingly. But, if an unexpected one-time issue pops up, have it taken care of.

How to Build an Emergency Fund

Building an emergency fund takes dedication. It’s totally worth the sacrifice when you have the money you need in the face of a true financial emergency.

The easiest way to build an emergency fund is putting your savings on autopilot.

If your employer allows it, you may be able to allocate a portion of your paycheck to your savings account through direct deposit. This method requires no effort at all after you submit the necessary paperwork.

If you don’t have that option, many banks allow you to schedule automatic bank transfers to transfer money from your checking account to your savings account each payday.

You could also set aside all side hustle income or save all dollar bills and change to go toward your emergency fund.

Ideal Size of an Emergency Fund

To start... Ideal goal... Super safe...
$1,000 3-6 months of essential expenses 12 months of expenses

But once you start building your emergency fund, how do you know when to stop? What is a big enough emergency fund?

The answer will vary depending on who you ask.

Breaking it down into small amounts and slowly saving over time will help you reach your targeted emergency fund balance.

Remember, once you fill your emergency fund, it’ll be there for you should your health, shelter or income be threatened.

Where to keep your emergency fund

You should keep your emergency fund in a safe, accessible place that has a very low risk of decreasing in value. That way, your money is there when you need it.

While you shouldn’t need to access your emergency fund immediately like you could with a checking account, being able to access it within a day or two should work in most cases.

For that reason, savings accounts, certificates of deposit (CDs) and money market funds are common places people keep their emergency funds. Each option has their positives and negatives to consider for saving money.

Savings accounts

Savings accounts are one of the most accessible places to keep your emergency fund that pay at least a decent amount of interest.

When considering savings accounts, make sure the account has low or no fees and a decent interest rate.

You may want to keep your savings account at a separate bank from your checking account so you aren’t tempted to spend the money.

If you need it, you should be able to transfer the money between banks in a couple days at the most.

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Certificates of deposit

Certificates of deposit usually offer higher interest rates than savings accounts. However, withdrawing money from a CD in an emergency could result in early withdrawal penalties.

Additionally, in an increasing interest rate environment, the return on your CDs may eventually fall below the interest rate of savings accounts.

To counteract these risks, consider building a CD ladder. To do so, divide your emergency fund into multiple parts. Then, invest each amount in a CD of a different length.

Over time, each CD will renew at a separate time allowing you to access the money if you need it. If you don’t need it, reinvest the money in another CD to continue earning interest.

Money market funds

Investing in a money market fund through a brokerage account is another option for the safety net. The return on money market funds will vary depending on the current market environment.

That said, the return on your money could exceed savings account interest rates at some points.

One major benefit to investing in money market funds in a brokerage account is you can sell the fund when you need access to the cash.

Unfortunately, it may take a few days to quickly access the cash in hand depending on your brokerage firm’s policies.

If You Have an Emergency, Use Your Emergency Fund

It’s difficult to break open your emergency fund after you’ve worked so hard to build it. Even so, you built your emergency fund for a reason.

If you’re facing a threat to your income, your shelter or your health, you should seriously consider using the money in your emergency fund to fix the emergency.

After you’ve dealt with the emergency, work to refill your emergency fund so it’s there for you the next time you need it.

Using your emergency fund isn’t admitting defeat. It’s declaring victory.

You worked hard to put yourself in a position that you could withstand these emergencies and having peace of mind without going into debt. Use the tool you built.