Your emergency fund is an important part of your financial plan, making it possible to pay the bills in the event of an unforeseen expense or loss of income. It is a cash cushion that must be carefully preserved to ensure those savings are available if and when you need them.
Financial professionals generally agree that tapping into those funds recklessly could create a cycle of dependency on high-interest credit card debt, not to mention jeopardize your ability to reach other financial goals, like retirement. But, as many discovered during the COVID-19 pandemic, there are moments when it may be necessary to siphon off some of those savings, said Chad Tourin, a MassMutual financial professional with Coastal Wealth in Fort Lauderdale, Florida.
· Job loss
A primer on emergency funds
Before exploring the scenarios in which using your cash stash might be appropriate, however, it may be worthwhile to define what an emergency fund is and how much you should have set aside.
Most financial professionals recommend saving at least three to six months' worth of living expenses in a liquid, interest-bearing account, such as a savings or money market account. (Related: Emergency fund basics)
If you are a single-income household, you should consider saving more, as you won’t have a spouse or partner’s income to fall back on. You may also need additional savings, up to a year or more, if you are an independent contractor with fluctuating income, or if your job security is uncertain.
But don’t let those estimates scare you. You need only save for the essentials (housing, utilities, car payments, food, insurance, and health care costs), not elective expenses that you could cancel or do without (such as gym memberships). And, ultimately, even if you never hit your savings goal, any amount you have set aside is better than nothing.
On the other end of the spectrum, it’s worth noting that having too much savings set aside for an emergency is generally discouraged. Why? You would miss the opportunity to invest and potentially build wealth through compounded growth. Remember, the interest rate on savings accounts is typically less than 1 percent. Another potential drawback of overfunding your emergency fund: You might miss out on tax savings if you are not maximizing tax-deferred contributions to your 401(k) or IRA.
What you should NOT use your emergency fund for
As the name implies, an emergency fund is intended for use only during an unforeseen event, not for a spontaneous road trip or a predictable expense. You need not deny yourself life’s little luxuries, of course, but you should create a separate savings account to pay for and factor them into your budget. To be clear, your emergency fund is neither a slush fund, nor a checking account. It is a vault.
“Those funds should never be tapped for vacations, for fancy dinners out with your significant other, or for the new purse you’ve been dying to have,” said Tourin, noting consumers should also resist using them to purchase holiday gifts.
Most financial professionals also discourage use of emergency funds to help pay for college tuition for their children. Parents should only help children pay for higher education if they have their own financial house in order, which includes maintaining an adequate emergency fund and fully funding their retirement accounts. You can still support your child by helping them to find and apply for low-interest loans. And, if your financial picture should improve, you can help them pay off that loan.
On the topic of getting your financial house in order, Paul Tokarz, a partner at WestPoint Financial Group in Chicago, Illinois, said anyone considering dipping into their emergency fund should ask themselves an important question: How did I get to this point? (Related: Budget basics)
“Generally, I would coach clients to double check their expenses first,” he said. “Are there monthly expenses that they can do without? Are there nice-to-haves that can be eliminated. The goal is to keep six months of monthly expenses in savings, so we need to look at how much is already in there and how we can tap into it while still trying to maintain some level of liquidity for further emergencies.”
Look, too, for alternative sources of available cash, said Tourin, which may include the cash value from your permanent life insurance, Roth IRA contributions, a 401(k) loan, or a reverse mortgage if you are a senior who owns a house; just be sure you understand the potential consequences of each. (Learn more: Reverse mortgages: What you need to know)
For example, borrowing against cash value life insurance increases the chances that the policy will lapse, reduces the cash value and death benefit, and may result in a tax bill if the policy terminates before the death of the insured.
A financial professional can help you make an informed decision.
One instance in which it might make sense to tap into your emergency fund is a job loss, said Tourin.
“Our entire financial picture rests on our ability to earn income,” he said. “If we are unable to work, bills don’t magically disappear and so it may be necessary to tap into your emergency savings to pay things such as your mortgage, car payment, utility bill, etc.”
You do not want to damage your credit by making late payments, which may disqualify you for the most favorable rates on future loans or preclude you from securing a loan entirely. (Learn more: Improving your credit score: It matters)
Find out first, however, if you are eligible for unemployment insurance benefits, which may help you cover the gap while keeping your savings intact. You may also be able to negotiate a temporary reprieve from mortgage or utility payments, especially during the COVID-19 pandemic when many service providers and lenders are offering leniency.
Costs related to health care, even for those with health insurance, can add up fast.
“Even the healthiest people unexpectedly become ill, which has never been truer with the pandemic we are experiencing,” said Tourin, noting health care expenses typically increase as we age. “Healthy individuals have health insurance with very high deductibles and out-of-pocket maximums because they rarely get sick, but if they do come down with an illness, they may be on the hook for sizable medical bills.”
Nearly one-third of working Americans have some form of medical debt and roughly 28 percent of those who have an outstanding balance owe $10,000 or more, according to a 2020 survey by Salary Finance. 
According to the Social Security Administration, just over one in four of today’s 20-year-olds will become disabled at some point in their working career. To protect against a major drain against finances in case of becoming too sick or injured to work, many people turn to disability income insurance. (Calculator: How much disability income insurance do I need?)
Unexpected home repairs
If you own a home, you should be budgeting for basic home maintenance and big-ticket items you can foresee down the road, including a new roof or driveway repair. But you should also feel free to fall back on your emergency savings if your hot water heater suddenly dies or your basement floods during a storm, assuming your homeowner’s insurance doesn’t cover the full tab.
“While it’s true that many of the items in our homes are covered by warranties, it’s also true that those items typically break down after the warranty expires and will either need to be repaired or replaced,” said Tourin. “Air conditioner units, hot water heaters, washer and dryers, ovens, stoves, and many other things are all necessary to the health and well-being of our family, and it would be acceptable to tap into your emergency fund to repair or replace these items.”
Car repair or accident
Here again, your monthly budget should factor in expenses for predictable car maintenance, such as oil changes and new tires. But a timing belt replacement or engine malfunction can set you back thousands of dollars in an instant.
“Similar to home appliances, cars are not meant to last forever,” said Tourin. “Things inevitably break down and you’ll need to replace those items to be able to use your car.”
You may also incur a significant expense in the event of a car accident, regardless of who is at fault, depending on your auto insurance deductible. Here again, it’s OK to use your emergency account to get your car back on the road, especially if you need it to get to work.
Loss of a spouse or another family member
Losing a loved one is a painful experience. It can also be expensive.
The median cost of an adult funeral with viewing and burial was $7,640 in 2019, according to the most recent statistics compiled by the National Funeral Directors Association, an industry trade group. When the cost of a vault is added, something required by most cemeteries, the cost rises to $9,135. (Learn more: Funeral costs and considerations)
Emergency funds can eliminate financial stress during a moment of grief, which can help you focus on your emotional well-being.
Rebuild your cash stash
If circumstances require you to raid your emergency fund, however, Tokarz offers two simple rules: Take only what you need and rebuild your savings as quickly as possible.
“If emergency funds are tapped, we recommend trying to adjust budgets as quickly as possible to restore that account,” said Tokarz. “You never know when you may need it again.”
While continuing to fund your other goals, including your retirement and paying down high interest debt, set a monthly savings goal, even if it’s only $10 a month, and keep at it until you’ve reached your goal.
That may require sacrificing family vacations for a while, taking on extra work gigs, or bringing on a roommate temporarily if space in your house (and community regulations) allow.
It takes hard work and discipline to build a financial safety net. Before you withdraw money from your emergency fund, explore alternative sources of cash that may be available and be sure you are using those dollars to pay for a legitimate need, versus a want.
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1 Salary Finance, “Inside the Wallets of Working Americans,” 2020.
2 National Funeral Directors Association, "Statistics," Aug. 29, 2020.