Knowing when to use the Emergency Fund

Having an emergency fund is a wise personal finance decision, but making the decision to have an emergency fund is much easier than knowing when to use it.  In order to know when to dip into the emergency fund, first you must define the term “emergency”.  There are many situations that can be deemed as a family or personal emergency, and many of them are good reasons to tap into the emergency fund.  Here are five common situations which may require you to use the emergency fund.

1. Unemployment.  It is foolish to assume that unemployment compensation will meet all of your financial needs in the event of a job loss.  In fact, most personal finance experts recommend keeping three month’s salary tucked away into an emergency account.  Of course, losing a job is no excuse to dip into this fund- unless your claim for unemployment compensation benefits has been denied.

2. Health and Medical Emergencies.  It’s one thing to dip into your emergency fund in order to take the family on a trip to Disneyland, and another thing to use this fund for legitimate medical and health-related expenses.  This is a no-brainer if you are one of the millions of Americans without health insurance, but even if you do have insurance you may still need to fork over some cash upfront for things like eye exams, cosmetic procedures, and prescriptions.  Some things in life are more important than money.  Health is one of them.

3. Vehicle Repairs.  Unless you work from home, you depend on your vehicle to get to and from work.  Car rentals are incredibly expensive (unless it’s covered by your insurance policy), so it’s almost always a good idea to use the emergency fund for major car repairs.  If being without a car negatively impacts your income, then tapping into your emergency fund is a smart idea.

4. Legal Costs.  Very few of us make it through life without requiring the services of a lawyer at one time or another.  Unfortunately, most of us cannot predict when we will need one.  Whether you find yourself as a plaintiff or a defendant, expert legal counsel is worth every penny.  Skimping on legal representation may save you money in the short term, but it will only cost you more in the long run.

5. Death of a Loved One.  It’s a sad reality, but the truth is that people sometimes die unexpectedly, and often without the benefit of life insurance.  If the unexpected death of a loved one doesn’t constitute an emergency, then nothing else will.

Everyone’s situation is unique and different, and what may be an emergency to one person may not be an emergency to another.  However, the five situations listed above are perfectly legitimate reasons to use the money in your emergency fund.