What Your Emergency Fund Should and Should Not Be Used For

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Any financial expert will tell you it’s a good idea to save money in an emergency fund. After all, it’s a matter of when — not if — unexpected expenses will come up. Having an emergency fund will help you cover those expenses so that you don’t have to go into debt or worry about how to cover them.

But how do you know which “emergencies” you should cover out of your emergency fund? If you dip into the fund too often, the money won’t be there when you really need it.

Next time you’re tempted to use your emergency fund, use this guide to help you decide whether that’s the best option.

How Much Should You Save in Your Emergency Fund?

Any emergency savings is better than no savings, but determining how much should you set as a goal for your emergency fund can vary based on your situation.

Experts often recommend putting three to six months’ worth of expenses in your fund. That way, if you unexpectedly lose your job, you have enough money to pay for all your essentials for long enough to find a new position.

To calculate your savings goal with this guideline, list all of your essential monthly expenses. These may include:

• Housing (mortgage or rent payments)
• Transportation (car payments, lease, gas)
• Groceries
• Utilities
• Other debt payments
• Healthcare
• Insurance
• Child care

For variable expenses like groceries, estimate how much you spend each month. Then, multiply your total essential expenses by three and six. For example, if your monthly essential expenses add up to $3,000, your emergency fund goal would be $9,000 to $18,000.

Tailor your emergency fund savings goal to your income and comfort level. You may want to set a more achievable goal, like $1,000, before setting a higher goal for your emergency savings. Around 44% of Americans could not afford an unexpected $1,000 expense, so you’d be ahead of the game with even a $1,000 emergency fund.

When To Use Your Emergency Fund

Everyone eventually faces unexpected expenses or financial hardships. Here are some circumstances when dipping into your emergency fund is worthwhile.

If You Lose Your Job

When you lose your job, your income falls — still, you have to pay for things like food, housing and transportation. That’s what your emergency fund is for. You can use the money to cover your essentials while you search for a new income source.

If You Have Unexpected Medical Bills

Accidents and illnesses can happen anytime, and you don’t want to delay getting the necessary medical care. Use your emergency fund for those medical bills.

If You Need To Repair Your Home or Vehicle

You simply can’t put off some repairs, especially for your home and vehicle. Use your emergency fund to cover the repair costs if something goes wrong and needs fixing.

When To Avoid Using Your Emergency Fund

Once you have an emergency fund with some money in it, you may find it tempting to use those savings for nonessential purchases. The money’s right there, waiting to be used, right?

Not exactly. An emergency fund is specifically there to cover unexpected financial emergencies. You never know when those emergencies will come up, so you shouldn’t touch the fund until you really need it.

Try to avoid using your emergency fund in these situations:

To Repay Your Debt

Carrying large debt balances, like on your credit cards, can hurt your finances, but your emergency fund isn’t for paying off debt.

You should create a separate plan for repaying your debt with your monthly income instead of your emergency fund. Otherwise, you may need to go into more debt the next time an unexpected expense comes up and you don’t have enough in your emergency fund to cover it.

To Cover Routine Expenses

Unless you lose your job, you shouldn’t use your emergency fund for your regular monthly expenses. Try to budget your income to cover all of your essential bills, plus some extra for saving or other financial goals.

To Pay For Home Renovations

While home repairs can be essential, home renovations aren’t. If you want to renovate your home, make a plan to save enough to cover the renovations separately from your emergency fund.

To Invest

Investing in retirement accounts and other investment vehicles is a great way to secure your financial future. But saving for emergencies is a more pressing concern. Don’t use your emergency fund savings to invest.

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