When To Use Your Emergency Fund

I was having an interesting discussion at work the other day, followed by reading a similar topic on a fellow pf blog, and felt like discussing it here to see what you guys think.

One of my coworkers just bought a brand new car. She had previously owned the same car for almost 10 years and was ready for a change. She prepared by saving up for the down payment and really did a lot of research into the car that she was interested in. Plus, because my company works with most of the dealerships here in Austin, she was able to get a really good deal on the price and interest rate.

She’s also got this new boyfriend, who thinks he’s a total financial whiz when in reality he’s a chef, and he’s been on her to use her CD to pay off the car and then just use the monthly car payments to rebuild her CD. She had been mulling it over and came to me to see what I thought. When she told me, my first question was, “Is it your emergency fund?”

She said it was and I advised against following the boyfriend’s advice. If the CD was an emergency fund and all the money she had in savings, then what would she do if something happened? Right now our jobs are pretty secure, but what happens tomorrow if they’re not? What would she do if she wrecked that vehicle? Since cars are depreciating assets, they drop in value the minute you take them off the lot. Her insurance and GAP would take care of the loan amount, but what would she buy another vehicle with? She’d be out that money with nothing to show for it.

Of course, these are big “what-ifs” mind you, but that’s what an emergency fund is for – the “what-ifs.” Paying off her car isn’t an emergency since she has budgeted – and come well below that amount, I might add – for the payment. It’s a new car with a great package for warranties and services. She really is better off just making her monthly payments for the four years and leaving her CD alone. She agreed and left it where it was.

Later that same day, I read a post by Debt to Dreams where he talked about using his emergency fund to invest in a joint business venture that had no guarantee of return.  I’m all for taking risks and going for your dreams, but he has a family and a day job in this scenario, and frankly, I’m not sure it was the wisest course of action. It may turn out to be the best thing he’s ever done. I hope it is. But, the reality is that he has left him and his family wide open for disaster to step in.

Which brings me to my point of when to use an emergency fund. This fund is supposed to take care of the little things that creep up from time to time as well as the major disasters that people hope don’t happen, but sometimes do.

Household Emergencies

This includes things like the refrigerator or air conditioner going out, replacing a water heater, or hiring a plumber. Things that are unexpected and need to be taken care of right away.

This does NOT include buying that new stainless steel refrigerator you’ve been eyeing just because it looks nice. Or that expensive washer and dyer set that matches the paint in your laundry room. These types of expenses are what you specifically save for.

Medical Emergencies

This can include a midnight visit to the ER, rushing a sick child to the hospital or pet to the veterinarian, or even an emergency surgery that may have come – such as needing to have a ruptured spleen removed, etc.

This does not include medical or dental services you can save for such as braces or certain types of oral  or day surgeries. You can prepare for these types of expenses well in advance, so they are not emergencies.

The Big Stuff

This includes a job loss, death in the family, or any other major emergency that arises. These are the big things that we hope never happen, but we prepare for just in case.

This is not a BIG sale at Macy’s, buying new furniture, or moving. Again, these are expenses that can be planned for and do not come up out of the blue. If it can wait, it’s not an emergency situation.

There are many other things that an emergency fund is good for, and having one is even better for peace of mind.  There are many things you shouldn’t use your emergency fund for, though. Paying off a depreciating asset and investing in a business venture that does not guarantee a return are probably at the top of the list for me.

What sorts of things have you used your emergency fund on? Would you have done the same as Debt to Dreams? What about my coworker, what are your thoughts on her situation?

23 thoughts on “When To Use Your Emergency Fund”

  1. No offense but your coworker sounds like an absolute moron! Getting bored with your car does not qualify as an emergency…

  2. Hi,

    Different people would have different motivation factors to keep them happy in their life.

    According to Maslow:

    1)There are 5 levels of needs arrange in the following order 1. physiological, 2. Safety, 3. Belonging, 4. Esteem and 5. Self-Actualization.
    2) Our lower level needs have to be satisfied before move on to the higher level of needs.

    I may be wrong, but from what you have described, your friend are in the belonging and self-esteem level, which means security and physiological needs no longer satisfy her. That is why she went on satisfy her higher need by buying a car to make her bf happy (belonging) and herself proud(esteem).

    Under this kind of market environment, most of us will be in the security need level so having back-up funds is important to us, but we have to understand that everyone unique. I wouldn’t say she is a moron or stupid, but maybe she just don’t have the basic personal financial training or she just didn’t get her priorities right. After all, it is her money, right?


  3. Hi

    I think you’re right – buying a car with your emergency fund is a bad idea! Frequently you will see advice about paying off debt rather than saving (because you save more interest on debts that you earn on savings). This is fine if you keep your job etc. but can end up being really bad advice if you do suffer some kind of crisis.

    This is even more true at the moment with credit being harder to get. You cannot be sure that you will be able to get credit in an emergency. If you are paying off credit card bills you might find that your credit limit is gradually reduced so losing you the line of credit that you thought you had.


  4. Rendell – that makes no sense to me. She’s destroyed her emergency fund by buying the car, meaning that she’s esentially sacrificing security/safety for a temporary feeling of belonging and esteem. Assuming you believe in Maslow’s theory, this action will put her back to Step 2!

    I’m with Kristy, Susan and Neil – this is a bad idea during the best of times, and during times like these it seems like financial suicide.

  5. I wouldn’t drain my e-fund to pay off a car.

    This year I’ve used my efund to buy a fridge when ours broke unexpectedly. I am so glad we had it there to use. We lived out of a cooler for two days and that was more than long enough. I was very happy when my fridge arrived.

  6. I’ve made some mistakes in my past by using my emergency fund when I shouldn’t have. It seemed like an emergency at the time, but on retrospect, it wasn’t. I think you have a good rule of thumb here, “You can prepare for these types of expenses well in advance, so they are not emergencies.” If you can plan for the expense, it isn’t an emergency. If it comes out of nowhere and has to be paid for right away, that’s an emergency.

  7. @ Susan – She’s not a moron, misguided yes, but not a moron. I think there’s a little confusion in what happened. She didn’t buy the car because she was bored or because her boyfriend told her to. She bought the car because she wanted to. She’d had her old car for a long time and wanted something new. Her finances allowed for it, so she did it. The problem is that her boyfriend thinks it’s a good idea to pay off the car using her CD instead of making the regular payments. That is what I think is a bad idea. She needs to leave her emergency fund alone and just make the payments as she originally planned.

    @ Rendell – I actually don’t think it’s a matter of security, esteem, or belonging. I think she simply wanted some guidance on what was the best course of action. I suppose if you wanted to get psychological on it, it comes down to security, but none of the decisions she made about buying the car were because she wanted to feel approval from her boyfriend. Her initial consideration of using the emergency fund to pay off the car was merely something she was thinking of. I think if she were truly seeking his approval and thereby residing on the level of belonging according to the hierarchy of needs, she would have simply done it without consulting me first. At the end of the day, she asked for advice, I gave it, and she followed it.

    @ Neil – I think having an emergency fund is critical no matter what the economy looks like. If people had listened and actually saved before the economy went downhill, they might have been better prepared. Now, too many people are scrambling and trying to get credit. I just had a member apply for a Home Equity line of credit today because her husband was laid off. They don’t have an emergency fund and now they’re trying to create one. We have to think long term. Yes, paying off our debts is important, but so is having an emergency fund. I understand the theory that paying off your debts first will save you money in interest; however, without an emergency fund, in the event of income loss, you’re not paying anything off.

    @ FB – Medical emergencies are part of what the fund is for, but what falls into the category “things that go beyond my $2-$5k savings?”

    @ Ashley – I’ve lived out of a cooler before and it’s no fun! I feel your pain and definitely agree that buying a new refrigerator when an old one breaks down is a perfectly legitimate reason to dip into the emergency fund. Can you imagine what it would have been like for you without the e-fund?

    @ elementaryfinance – Amen!

    @ Dawn – I think a lot of people make mistakes with their emergency funds. The average consumer doesn’t realize that they should have a separate account from their savings for this. Some people are savvy enough to combine their savings and emergency fund account into one. More power to them. I like to have a separate account specifically labeled “Emergency fund” so that I know what it is and I don’t go dipping into it. I have another coworker who’s set her emergency fund up as her overdraft protection. I don’t think that’s a good use of an emergency fund either, but she seems to think it is. I can’t sway her otherwise, but what do you do?

  8. I’m all for having a solid emergency fund and now, with my wife’s recent job loss, we’re glad we have a good cushion. I remember back when we had less than $1,000 in our emergency fund and seriously don’t know how we slept at night.


  9. @ 1MansMoney – I’ve often wondered how I slept at night back when I didn’t have an emergency fund. In my case, ignorance was bliss. I had no idea I needed one. When I really figured out that it was a vital part to my financial success, I sat down and got to work on building one. I can’t imagine having one and then throwing it away on something that wasn’t an emergency, though. Like Jonathan said in a previous comment, that’s financial suicide!

  10. This is great advice. I always use the instance of my father dying suddenly and having to take a week unpaid off of work as the perfect case for an emergency fund. You need some accessible cash all the time and the second you put it toward something like a car payment is the second your car will break down. Good advice Kristy!

  11. Thanks Nicole! Your situation is another good example of when to use an emergency fund. Having to take unpaid time off of work can leave you in a bind and if you don’t have vacation or PTO to make up for it, it can cause a problem. As a matter of fact, we’re going to have about 3 days unpaid coming up soon as we transition to a new work week. Currently, our week runs from Thursday to Wednesday – which is strange and I know of no other company to do that – and we’re transitioning to a Sunday through Saturday like the rest of the free world. But, the way they’ve chosen to do this will actually leave us with three days off our checks. We won’t actually get paid those three days until we leave the company. I’m not keen on that to be honest, I think it would be fine if we were just getting those three extra days on the next pay period, but apparently they can’t do that. So, my emergency fund will come in handy should I have anything that arises during that time. But, I think it will be fine. I keep a buffer in my checking account and then there’s my savings. There shouldn’t be a need to touch the emergency fund, but it’s there just in case.

  12. We use our Emergency Fund the same way you do Kristy :) I like to think of it as a “flat tire scenario” – something you can’t plan for. You’re driving down the street all willy nilly blaring some hip hop and then BAM – your tire pops! aka emergency.

    I actually heard once of someone using their 401k as their emergency fund! WTF?

  13. Most recently, I used it for part of a down payment on a car. I graduated from college (last May, hurrah!) and two weeks later (before I even got my first paycheck), my car dies. Ok, I could have fixed the water pump, but the car was 17 years old and had more problems than I have fingers and toes. Anyway, so I spent three months without a car, saving everything I could, drained my eFund down to $150 dollars, and bought a new car. I’ve since built the eFund back up and then some. I plan to keep going on that until I get 3-4 months basic expenses and then start paying extra on the car.

    In general, if taking money from your eFund makes you think, “Oh man, I REALLY wish I didn’t have to take money out for this,” it’s probably an emergency. If you’re thinking, “I’ll just pay that back next month,” probably not so much. :)

  14. Kristy-I agree with you on this. I can’t see using an ER fund to pay off anything as long as it’s still within my monthly budget. If it’s not within my monthly budget then I’d look at ways to live within my means before using any savings or an ER fund. If that means taking the bus more, scaling back the cable package, cutting my cell phone plan, etc. then that’s probably the wisest course of action. I think she made the right choice by asking for an unbiased opinion and then following her original instincts. Great article!

  15. Why does a broken fridge constitute using emergency funds, but a car does not? Especially, if said car has broken down. I’d say you can anticipate needing a new refrigerator, heater, roof, etc. the same way you anticipate a new car. Is there some flawed logic there?

  16. @ Sarah – In this case, the car was not broken down. She was simply considering using her emergency fund to pay it off. In regards to your question, yes sometimes you can anticipate needing new things around the house, but sometimes not. My parents had a three year old refrigerator go out due to a malfunctioning coil. That wasn’t something they anticipated. Had the refrigerator not been under warranty, that would have been an emergency. Now, if your car breaks down and you need immediate repairs in order to get to work, sure, use your emergency fund. But that wasn’t the case here, it’s a completely different situation. Again, if it can be anticipated, it is not an emergency and can be saved for. If it’s unexpected and needs immediate attention, that constitutes and emergency.

    Obviously people will use their funds as they see fit, I’m just explaining when what an emergency fund is supposed to be for.

  17. I’m with Sarah in Alaska. I think replacing appliances is something that isn’t an emergency – a small escrow fund dedicated to household repairs and appliance replacement that is seperate from your main efund is the way to go. After all, you know that these issues are going to crop up – and it’s just a matter of time.

    I actually subdivide my efund into three buckets – the car repair/replace escrow fund, the aforementioned house/appliance escrow fund, and the BIG efund – the OMG lost my job / need emergency surgery / have to fly across country to be with my wounded son….. (please G*d not that one…)

    Having different ‘buckets’ lets me budget better and I don’t feel guilty raiding one of the escrow funds for their apointed purpose.

  18. @ threadbndr – That’s an excellent way to break down your emergency fund, and if it works for you, then fantastic! I love it and I’ve been toying with the idea of doing that myself, currently I just throw all of that into one account, but I have 6 months expenses, plus the extra for that stuff. However, getting people to even start an emergency fund is a tough thing to do. People will give you all kinds of excuses why they can’t save money. For those people, having three different buckets, as you say, may be more than they are willing to cope with. Keeping it simple is the best way to motivate those who’ve never saved before, at all.

    In regards to appliances breaking down, that really is a tricky subject. I see your point, and saving ahead of time is a fantastic idea. However, if the appliances are fairly new and something unexpected happens, that’s an emergency. Of course, let me qualify that statement a little. The only appliance I would really consider an emergency if it broke down would be the refrigerator. Dishwashers are a convenience, not a necessity. Washers and dryers you can go without a little while and use the laundry mat. But, a refrigerator is a necessity, so to me, if that goes down, it’s a legitimate reason to use the emergency fund. In an ideal world, we’d save separately for these types of things, but in reality, it doesn’t happen that way.

  19. We had quite a substantial emergency fund year before last (thanks to an inheritance) but it was depleted by $10,000 when we let my brother, sister in-law & little girl stay (nearly rent-free) in our old house whilst we paid for our new one.

    Now, I KNOW we did the right thing (nmany would disagree) and we have been reimbursed (not just fiscally) by God on any no. of occasions.

    Goal to reach AUS $20,000 by year’s end.
    Already, this year we’ve had a few hiccups in which the emergency fund has taken a beating – but PRAISE GOD we have our health & happiness.

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