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Knowing when to use your emergency fund

So you busted your hump to save money for your emergency fund. Awesome!!! This is a pretty big deal. At first your emergency fund was 100 bucks, then it was 5 hundy, then a grand, and now it’s (ideally) 3 months worth of expenses. So now what?

Well, hopefully nothing. Stop saving into your emergency fund once it hits 3 months expenses and start directing new monthly savings into a second tier of savings, investing actually. An emergency fund is not an investment, it is savings. Money that you save beyond your emergency fund can begin your life as an investor. Alas, that is a different post. Today I want to focus on knowing when to use your emergency fund.

Your emergency fund is not an “opportunity fund”. You did not scrimp, save, and sacrifice in order to accumulate this fund to simply blow it on something less than important. The money that you accumulate beyond this emergency fund is what you use to fund vacations, gifts, cars, etc. Knowing exactly what a financial emergency looks like is very important.

Things that you should not use your emergency fund for:

Vacation, down-payments, holidays and gifts, a dress for an upcoming event, guilt jewelry, consumer electronics, Nordstrom’s half yearly sale, or landscaping

Things that you should use your emergency fund for:

Insurance deductibles, medical bills, necessary car repairs, pet medical costs, emergency appliance replacement, funding a “stay-at-home” parent on a temporary basis, job loss, staying out of collections

Don’t hesitate to use your emergency fund when it’s appropriate. I have seen many people not use the fund when they should, and then it throws off their budget and cash flow for months to come. Simply pay for the emergency expense out of the fund, and then refill the fund to the appropriate 3 month expense level over the next few months.

When in doubt, ask a WISE friend if they think your “proposed emergency” is an actual emergency.