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When should you spend your emergency fund?

A man sits by his car that broke down.
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One of the fundamentals of personal finance is the idea that you should have an emergency fund. Starting an emergency fund is often emphasized, but we don’t talk as much about when you should tap into that money.

Now that many are facing financial concerns due to the coronavirus pandemic, it makes sense to start thinking about when to access your emergency fund. Here’s what you need to know about deciding when it’s time to withdraw money from your savings.

What should you use your emergency fund for?

It can be challenging to figure out when and how to use your emergency fund. Here are four instances where it makes sense.

1. Job loss

One of the biggest financial emergencies is job loss.

The unemployment rate remains high as the COVID-19 pandemic continues to put a damper on the job market. If you lose your job, you might need to tap into your emergency fund to cover essential expenses like housing and food.

2. Income reduction

Even if you don’t lose your job, you might see your hours or salary cut.

If that’s the case, you might need to cover the gap by dipping into your emergency savings. Figure out what you can cut from your budget to see if there’s a way for your reduced income to cover most of the essentials, and then turn to your emergency fund for the rest.

3. Medical bills

Medical bills are a huge source of stress and financial distress. Even if you have health insurance, you might be on the hook for a co-pay and you still might need to reach your deductible. In that case, it might make sense to turn to your emergency fund to pay some of your bills.

However, you can reduce how much you take from your savings account at one time by checking with your healthcare provider to see if you can set up a payment plan.

4. Repairs

If you rely on your car to get to work, you might need to access your emergency savings to pay for a car repair. Additionally, you might need to purchase a new appliance if there’s a major breakdown. Tapping your emergency money to cover these costs can be a better option than using a credit card and carrying a balance.

What you shouldn’t spend your emergency fund on

Be careful of what you label an emergency. While times are stressful right now, it still makes sense to take a step back and review whether you’re spending on needs or wants. Try to avoid using your savings on nonessential items.

Here’s a good barometer: Consider whether you actually need something to survive. If not, think twice before using emergency fund money for the purchase.

If you use your emergency fund now, you might not have access to the money later — when the need becomes dire.

Some financial experts suggest making an emergency budget that cuts most of your spending to the bone. One way to do this is to review your spending from the past few months and then identify the least important expenses. Those are costs that can be cut in the event of an emergency and reduce your overall cash outlay. This can help you reduce the chances that you’ll turn to your savings account for nonessential costs.

How to reduce what you take from your emergency fund

When you’re facing financial hardship, whether it’s from job loss, medical bills or some other issue, it’s important to look for a way to stretch your emergency savings for as long as possible.

Creating an emergency budget can be one step toward making your money last longer. But there are a few other things you can do as well:

  • Apply for unemployment benefits: If you lose your job, immediately apply for unemployment benefits. Those benefits might take a while to materialize, which is why it’s so important to apply, even as you look for another job. Receiving the benefits can help reduce how much you rely on your emergency fund.
  • Look into community resources: Your community is often a great place to turn in times of need. For example, many cities and towns have a food bank to help you reduce the need to tap into your emergency fund to buy groceries. Additionally, there might be emergency utility and housing assistance in your community. Reach out to local agencies and non-profits to see if you qualify.
  • Talk to your creditors: Depending on the situation, you might be eligible for some degree of forbearance. Some mortgage lenders have provided options for relief in response to COVID-19, and you might be able to receive forbearance or other help. Keep in mind, your interest will still accrue, though, and eventually, you’ll have to get up to speed or create a repayment plan, so be aware of that before you move forward.
  • Get help from friends and family: In some cases, you might be able to get help from friends and family in a pinch. Of course, that means you need to be ready to return the favor later if your relatives fall on hard times.
  • Turn to the gig economy: Consider signing up for gig work, such as DoorDash, Postmates or doing some other type of work. The extra income can go toward paying for some of the essentials,  reducing your need to withdraw money from your emergency fund.

If you can find other ways to keep from tapping your emergency fund as frequently, that can be a big help and reduce the need to rebuild as much.

How to rebuild your emergency fund

Now that you’ve used some of your savings, it’s time to consider how to rebuild your emergency fund. This might not be as simple as it sounds — after all, we’re still in the middle of a global pandemic.

Here are some tips for replacing your emergency money:

Start small

You probably can’t replace the money you use at one time. It’s fine to start small. Figure out how much you can put in each week — even if it’s $5.

Increase the amount you set aside

As your finances stabilize, look for ways to increase the amount you set aside. If you find a new job, you might be able to increase your contributions even faster. But make it a goal to increase what you set aside incrementally.

Make it automatic

Set up automatic transfers so you don’t have to think about it. Regular transfers can help you begin to rebuild your emergency fund without you needing to remember to make it happen.

Use windfalls

Build up your emergency savings faster by applying windfalls toward your fund. If you get a tax refund, a bonus at work or some other unexpected money, use a portion of it to replenish your emergency fund.

Bottom line

Don’t be too hard on yourself if it takes you longer than you’d like to rebuild your emergency fund. It’s a difficult and stressful time.

However, if you can, putting aside money for your emergency fund can be one way to reduce the chance that an unexpected problem will catch your budget off guard.

Featured image by WAYHOME studio of Shutterstock.

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Written by
Miranda Marquit
Contributing writer
Miranda Marquit is a contributing writer for Bankrate. Miranda writes about topics related to investing, saving and homebuying.