One of the first pieces of advice any personal finance pro would give is to build an emergency fund that covers enough basic expenses for six months to one year. So, the purpose of the emergency fund is to provide short-term cash in the event of a job loss. However, other emergencies do crop up. Cars break down, our health fails, the house floods. So, the question is, when can you use your emergency fund? Should you create other saving accounts specifically for car repairs, home repairs, etc instead? For now, I think just having an emergency fund is enough for me. Once I saved a suffiecient about, then I’ll start savings account for non-wage related emergencies.
I use a few guidelines for when I can use money from my emergency fund, other wage loss.
- The event should be unexpected
- The event requires immediate attention
- I cannot cover the cost of with my regular budget
The emergency fund is not for expensive things that I want but don’t have funds to pay for right away. In other words, I don’t let myself “borrow” money from my emergency fund.
So far, I have only used my emergency fund once, about a year ago, right after I graduated from college. While in school, my parents help me cover part of rent, and I had a small meal plan that covered a few meals a week. I had a part-time job with a small biotech start up that covered all my other expenses. My bills doubled upon graduation since my parents stopped covering part of rent and my roommates moved out. My first paycheck as a post-college adult was $400 from working part-time the previous month, which was not even enough to cover rent at the time. I began working full time right away, but wouldn’t get my paycheck a month later. So, I used about $700 from my emergency fund to cover the rest of my bills and food my first month out of school. I spent the rest of the year slowly replenishing my emergency fund back to $5000.
What guidelines do you use to determine whether you can take out money from your emergency fund? Have you ever taken out money from your emergency fund? What did you use the money for?