7 great reasons to use an emergency fund
By Miranda Marquit
April 6, 2015
You know you're supposed to have a good emergency fund for a rainy day. But how do you know what constitutes a true emergency?
“Ideally, the right time to use your emergency fund is never,” says Karen Lee, a certified financial planner and author of the book “It's Just Money, So Why Does It Cause So Many Problems?” “It would be nice if nothing bad has happened to you or your family.”
However, life doesn't work that way, and you are likely to run into costly problems requiring an infusion from your rainy day fund at some point in time, Lee says. So what are the right reasons to dip into that fund? Here are seven:
1. To meet your insurance deductible
If something happens to your home or car, and you need to pay a deductible as part of your insurance claim, turn to your emergency fund. “Similarly, you should use money from your emergency fund if you have health issues and need to meet the deductible and can't do it out of your regular cash flow,” says Lee.
An adequate emergency fund allows you to increase your insurance deductibles, resulting in lower monthly premium payments, which is a good way to save more money.
2. To cover a disability “wait” period
Your emergency fund can take the place of short-term disability insurance, as well as cover expenses before long-term disability kicks in. An emergency fund amounting to between three and six months' worth of expenses should get you through any disability waiting period.
3. To replace or repair cars, appliance
Regular car maintenance should be built into your budget, but major repairs can be a reason to tap your emergency fund. Likewise, repair or replacement costs on major appliances. However, only replace major appliances with rainy day fund funds if they break down unexpectedly. Buying something new because you're ready for a change isn't an emergency; you should save up for that type of major purchase.
Lee also warns that you shouldn't use an emergency fund to make home renovations. “These are planned expenses that should be saved for in advance,” she says.
4. To cover illness or death expenses of a loved one
When someone close to you dies, sometimes there isn't life insurance to cover final expenses. Or, if there is life insurance, there might be lag time in paying the claim. In these cases, your emergency fund can smooth the way.
“Figure out the amount you need to keep your fund. Replenish it as soon as possible after you use it.”
–Pamela Capalad, Brunch & Budget
“You can also use your emergency fund if you have to buy an expensive, last-minute plane ticket to visit sick family or attend a funeral,” says Pamela Capalad, a certified financial planner and the founder of Brunch & Budget. Some airlines offer bereavement discounts to consumers flying to funerals, but you can't count on it.
5. To pay off debt
This is a tricky reason to use your emergency fund. You don't want to deplete your emergency fund to pay off debt, only to experience an unexpected expense and go into debt all over again. However, if you have a small debt that you can discharge while still leaving your rainy day fund mostly intact, the peace of mind (and interest savings) might be worth it.
6. In case of job loss
If you are laid off, you may be able to collect unemployment benefits, but these are often inadequate to meet your family needs without drastic changes to your budget. Your emergency fund can augment your benefits until you find something new. A large emergency fund also allows you more time to look for a job, rather than rush into the first offer you receive.
7. To start a business
You don't have to limit your use of the rainy day fund to layoffs. Having a large emergency fund provides you with more options for your career. “Use your rainy day fund when you want to quit your job to pursue a new career or start a new business,” suggests Capalad.
An emergency fund can help you maintain your family's lifestyle while you become an entrepreneur or while you go back to school to gain the education that will help you move up the ladder. A large cash cushion is essential if you choose to use it in this manner. Rather than saving three to six months' of expenses, it makes more sense to save up 9 to 12 months' worth.
Replace the money quickly
Once you use rainy day funds, you should replace it as quickly as possible so you aren't empty-handed during the next emergency. Build into your budget a set amount of money that can go into the fund every month, even when the fund is at a healthy level. If you automatically put, say, $100 into the fund each month, when you have to dip in, it won't be a hardship for you to replenish it, because you don't “miss” that $100.
“Figure out the amount you need to keep your fund,” advises Capalad. “Replenish it as soon as possible after you use it.”