When to Use Your Emergency Fund

See how to start your emergency fund, where to keep it and when to use it.

About 20 percent of Americans struggle to stick to a budget, while nearly 13 percent find saving up an emergency fund to be a financial challenge, according to GOBankingRates’ 2015 Life + Money survey.

But while Americans might struggle to save, an emergency fund is among one of the most important ways you can avoid financial ruin in the event of an emergency situation. Here are common ways people use and misuse their emergency funds, and how you can start saving today.

See: 62% of Americans Have Under $1,000 in Savings

Common Reasons People Tap Into Their Emergency Funds

There are many different reasons why people dip into their emergency savings. Some put all of their savings into one account, clumping together emergency funds and typical savings. Although this is commonplace, it can put your long-term savings goals, like a home down payment, in danger.

As you save up your emergency fund, keep in mind that the money you’re saving is best left for actual emergencies. Here’s what you should and should not put emergency funds toward.

5 Things to Use Your Emergency Fund On

Although you’ll generally save your emergency funds for unexpected expenses like a medical emergency or car breakdown, you can also put your funds toward expected expenses, like a major car or home repair.

Learn: 9 Steps to Saving a $10,000 Emergency Fund

1. Unemployment

15 percent of Americans say their biggest financial fear is losing their job, according to GOBankingRates’ Life + Money Survey. 18 percent say their biggest fear is living in perpetual debt. An emergency fund is intended to not only help you ride out job loss, it’s also meant to save you from getting trapped in massive debt.

2. Medical Emergency

Whether you’re in need of a root canal or have caught a terrible bug, a medical or dental emergency can cost you hundreds, if not thousands, of dollars. Although medical emergencies are an unpleasant reality, your emergency fund can safeguard you from financial ruin should one arise.

Cost Estimates for Emergency Room Visits
Acute Bronchitis$595
Sore Throat$525
Strep Throat$531
Upper Respiratory Infection$486
Urinary Tract Infection$665
Data from Debt.org from Dec. 30, 2015.

3. Car Emergency

The vast majority of Americans drive to work alone, according to FlowingData, meaning your car might be your only reliable means of getting to the office. Some of the most common causes of car breakdowns for drivers are dead batteries, empty gas tanks, flat tires, alternator faults and bad clutch cables, according to Automobile Association. Your emergency money should cover the cost of a tow truck plus mechanical issues.

Cost Estimates for Car Repairs
New Car Battery$170 — $300
Tire Puncture Repair$20
Car Radiator Repair$400 — $600
Brake Rotor Replacement$30-$60
Car Windshield Replacement$300
Car Transmission Repair or Replacement$50 — $3,000
Oil Pump Replacement$350 — $600
Starter Replacement$500
Data from CarsDirect.com from Dec. 30, 2015.

4. Emergency Home Repairs

Redoing your kitchen counters doesn’t qualify for an emergency, but a broken heater in the dead of winter does. From leaky roofs to a plumbing emergency, repairs to fix property damage can easily cost you hundreds of dollars.

HomeAdvisor identified the average cost of numerous home repairs. Consider the following costs:

Average Cost of Home Repairs
Repair a toilet$194
Clogged drain$199
Repair water heater$481
Repair drainpipe breakage$560
Repair water main$875
Install new plumbing pipes$1,185
Data from HomeAdvisor.com from Dec. 30, 2015.

5. Bereavement-Related Expenses

Planning for any expenses that might arise from losing a loved one might be uncomfortable, but it’s a necessity. The median cost of an adult funeral with viewing and burial was $5,582, according to the National Funeral Directors Association. You might also need to purchase a last minute plane ticket or take unpaid days off work.

5 Things to Not Use Your Emergency Fund On

Since everyone’s financial obligations and daily obstacles can vary dramatically, being able to tell whether something is an emergency situation can be difficult. However, by knowing which expenses can be addressed simply by shifting day-to-day spending, you’ll be better at determining when to break the lock off of your emergency savings fund. Here are five times you shouldn’t tap your emergency fund.

1. Holiday Spending

The National Retail Federation estimated that the average holiday shopper spent over $800 on gifts in 2015. No matter how much or little you spend over the holidays, you should never tap your emergency savings for gifts.

2. To Start a Business

Over time, you might build up quite a bit of savings in your emergency fund. And while starting a business can be a costly venture, you should never take money out of your emergency savings to pay for one.

3. A Home Down Payment

While your home might be a great investment into your future, draining your emergency savings to help buy one can lead you to financial disaster. If you’re a first time homeowner, you’ll quickly find numerous hidden costs in homeownership, from property taxes to maintenance. Your emergency fund should help manage those hidden costs if your budget falls through.

4. Home Remodel

A home remodeling project can be a great way to boost equity in your home; it can also lead to a whole slew of other problems. One faulty plumbing error in your bathroom remodel can cause a whole mess of damage to your home. Save your emergency fund for when these types of problems come up.

5. Vacation

Even if you come across a vacation package at a steep discount, your emergency fund is not a vacation fund. You should be saving separately for vacations, no matter where you plan on going.

Factors to Consider When Building an Emergency Fund

As you build an emergency fund, consider your lifestyle, regular expenses and financial goals. Casey Bond of Student Loan Hero, a resource for graduates saddled with student loan debt, said how much you should save is highly dependent on your current income and expenses.

“Many financial experts will recommend a specific number to aim for — $1,000, $10,000, etc.,” she said. “But if your monthly expenditures are $3,000 and you lose your job, have a medical emergency, etc., a $1,000 emergency fund is going to do little to keep you above water.”

She recommended you aim to save three to six months’ worth of expenses. “This ensures that if you truly find yourself in a financial emergency, you have enough of a safety net to cover basic needs while you remedy the situation,” she said.

As you calculate how large your emergency fund should be, consider the following common expenses:

  1. Rent/mortgage costs
  2. Utility bills
  3. Credit card debt
  4. Cell phone bills
  5. Cost of food
  6. Student loans
  7. Car payments
  8. Car insurance
  9. Health insurance
  10. Personal loans

Unless you plan on cutting out all extraneous expenses in the event of an emergency, you’ll also want to plan for entertainment expenses, such as the cost of going to the movies or for drinks. You’ll also want to factor in the cost of small, daily expenses, such as the cost of a cup of coffee at Starbucks. Accounting for these small purchases can help you avoid burning through your emergency savings faster than you expected.

If you are married or have kids, you’ll want to account for their income and expenses, as well. If you live in a two income household, for example, you’ll want to know ahead of time how your spouse’s inability to work can affect the household budget. Knowing how much weight your spouse is carrying will help you accommodate for them if they are unable to work due to injury, illness, pregnancy or job loss.

Where to Store Your Emergency Fund

Your emergency fund shouldn’t be stashed in a piggy bank or hidden under your mattress; it should be in a bank or credit union so that it can earn interest. “A high-interest savings account is a good option for keeping money safe in a federally-insured account while keeping pace with inflation,” said Bond. You can also opt for other types of deposit accounts.

The three basic deposit accounts you’ll likely find at your bank or credit union are savings, money market and certificate of deposit (CD) accounts. However, Bond advised against CDs, saying, “Money in a long-term CD, market securities or other less liquid assets will result in penalties if you need to pull it out.” Be mindful of how long you lock away your money in a CD to avoid losing money on your savings in the event of an emergency.

Currently, the average rates for all three deposit accounts are pretty low. However, rates are expected to go up incrementally over time now that the Fed has decided to increase interest rates.

Average Rates for Deposits (<$100,000)
Savings0.06% APY
Money Market0.08% APY
12-Month CD0.21% APY
36-Month CD0.48% APY
60-Month CD0.79% APY
Data from FDIC.gov from Jan. 4, 2016

Here’s what you need to know about each type of deposit account:

  • Savings Accounts: Typically, online savings accounts tend to offer higher yields. For example, Synchrony Bank boasts a 1.05% APY on its High Yield Savings Account. In comparison, Bank of America’s Regular Savings Account only has an APY of 0.01%.
  • Money Market Accounts: Money market accounts tend to pay higher rates than traditional savings accounts. Ally Bank’s money market account has a APY, and Discover Bank’s money market account offers an impressive 0.80% APY.
  • Certificates of Deposit: CDs also tend to offer higher rates than savings accounts. The catch, however, is that you have to leave your money in the account for a specific amount of time in most cases. For example, CIT Bank offers a high APY of 2.20% on its five-year CD. But, account holders can’t touch their funds in the CD account until those five years are up — unless they want to get hit with early withdrawal penalties.

Your emergency fund should be in an account that offers the most interest, but you’ll also want to make sure your account isn’t charging you tedious fees that can dwindle your balance. And if you have a hard time letting your money sit there, you might want to choose a CD that imposes an early withdrawal penalty. That way, you’ll be encouraged to let your money grow.

See: 5 Ways to Build an Emergency Fund in 5 Months

How to Save an Emergency Fund

Saving up an emergency fund comes down to simple budgeting. However, many Americans struggle to save. Catherine Alford, a family finance expert and writer, said that while saving an emergency fund might be a challenge, saving comes down to “[H]ow you spend your money versus how you save your money.”

Here are three easy ways you can build an emergency fund:

  • Automate your savings: If your budget is tight, Alford said, “People can start slow, with the price of a McDonald’s meal going into their savings every month automatically. They won’t even miss the $10 a month.”
  • Use Elizabeth Warren’s 50-20-30 rule: When you get your paycheck, divide it into three categories — put 50 percent toward needs, 30 percent toward wants and 20 percent in your emergency fund.
  • Create a CD ladder: Open three to five certificate of deposit (CD) accounts with different terms, and deposit money into each one. After one CD matures, reinvest the money in another CD, and continue this trend until all of the CDs mature. Your savings will grow faster than if you were to put the money in a savings account or just one CD.

If you still think you’ll need help budgeting and saving an emergency fund, consider using the following tools and resources:

  • PNC Fund Emergency CalculatorBy entering your home, family and everyday expenses as well as your loans and payment obligations, you can easily calculate how much you should keep in an emergency fund.
  • Mint App: This app helps you budget and save money by compiling all of your balances and transactions in one place. Plus, it gives you custom tips and recommendations on how to save.
  • America Saves Text Messages: Created by the nonprofit Consumer Federation of America, this campaign encourages people to save money. By signing up for its text message service, you’ll receive up to four message per month with savings tips and reminders.
  • SaveUpAfter linking your savings account, you can earn rewards points for saving money. With those points, you can then play games to win prizes, including coupons, gift cards, cash and more. It’s a great motivator that can help you stick to your savings plan.

How Much to Save for an Emergency Fund

The size of your emergency fund will vary based on your monthly living expenses, your health insurance deductible and other factors. When calculating how much you need to save for an emergency fund, Carl Seidman, CPA, said to, “Know how much certain household mechanical equipment costs to fix or replace. Know which are more likely to fail.” He also suggested you, “Save up enough to cover your medical deductible in the event an emergency maxes it out.”

How much you end up saving is up to you, but Alford suggested, “[I]nitially save $2,000, which will cover most house and vehicle repairs, then slowly grow it to six months of expenses for those big unthinkable emergencies.”

Although your emergency fund should, for the most part, be sitting in an interest-bearing account, like a money market account, when the time comes for you to use it, you’ll be glad you put the money away. And saving a hefty amount is important for Americans.

Jennifer Calonia contributed to this article.

  • Dumb

    People who are too afraid to use their emergency savings when there’s a freaking emergency are so dumb. #firstworldproblems

  • I’m a 70 year old who can no longer work and I had to use my savings for medical reasons. I have Medicare now but I can’t pay my rent or utilities, what can I do?

  • Peggy

    I’m a big advocate of saving when you can. I was unemployed for two months and having some money saved up really helped alleviate some of the stress and allowed me to focus on the job hunt.

  • Christina Lavingia

    You can also go on the other end of the spectrum where you never use your funds, even when your reason is legitimate. It’s important to feel out when it is appropriate, as you could damage your financial situation by misusing these funds — or not using them at all!

  • Kayla

    These are great tips. My main financial problem is figuring out how much or what percentage of my paycheck I should stick into my savings.

  • Seth

    After building my emergency fund I started adding some specific buffers to it. I added a good cushion solely for emergency car repairs, and then later some money for urgent or unexpected medical expenses. So I have my emergency fund for true emergencies, and then a bit for just the unexpected and inconvenient extra expenses of life while preserving a safety net.