Starting a chunky emergency fund is often highlighted as a very important aspect of personal finance. However, we still don’t talk as much about when you should tap into those funds. For instance, if someone faces an unexpected car repair bill, would this imply that they should dip into their emergency fund or simply explore other financial avenues?

It’s quite a dilemma that too many individuals out there constantly grapple with when they need to confront diverse financial emergencies that could potentially disrupt a carefully balanced budget.

The stakes are even higher as the interest rates might fall soon, with 93% of experts polled by Bankrate stating that the Federal Reserve will cut rates in 2024. That would also lead to lowered annual percentage yields (APYs), on your savings account and less growth on deposits.

The truth is, most Americans don’t have robust emergency funds, as 44% of them state they simply can’t cover a $1,000 emergency expense from their savings. However, personal emergencies might appear.

What really matters is to understand when to spend emergency funds and when to save them for better times. Here are some of the instances when it’s needed to withdraw money from your savings and how to protect the money as well as you can.

Here are some statistics you might find useful

• Only 44% of American citizens would pay for an unexpected emergency expense from their savings
• The majority of people (66%) are worried that if they were to lose a primary source of income tomorrow, they wouldn’t have the needed emergency savings to cover their immediate living expenses
• Over a third (36%) of U.S. adults stated they have more credit card debt than emergency savings, and the stats show the same thing since 2023
• As 30% of adults have more emergency savings than they did a year ago, a higher percentage (32%) have less

What should you use your emergency fund for?

Emergency funds are meant to help you pay for all sorts of unexpected costs or even cover expenses during a loss of income. Here’s a familiar scenario you should be mindful of facing an unexpected medical emergency.

Having robust health insurance, the unforeseen costs that are often associated with sudden illness can rapidly accumulate. These expenses, cumulated with needed time off from work to fully recover can often become overwhelming.

So many adults find a reason for concern in stashing money away from such unpredictable events. In fact, 56% of employed Americans declared they contribute to an emergency fund at least once a month.

And for those who state that money concerns are the number one reason that affects their mental health, among top money concerns we find rising prices and paying for everyday expenses. These are the main areas where emergency savings might be needed to preserve proper financial stability.

And in crisis, having a proper emergency fund offers way more than just financial relief. It also brings peace of mind. Here’s a breakdown of some of the most important scenarios where dipping into your emergency savings could be a good idea to overcome financial hardship and keep everyday living standards.

Job loss

Probably one of the most impending and alarming financial emergencies set in when dealing with a job loss. If you lose your job, you might have to use your emergency fund to cover all the needed expenses, whether it has to do with housing or food.

Those savings can also be used for some job search-related expenses, like attending different network events or even job fairs and relocating for new opportunities. Finding the right side hustle can also supplement your emergency savings as you search for a new job.

The extra income from freelance work or even part-time gigs can also be used to cover essential expenses, and maybe even extend your emergency fund and help you build more skills for future employment.

Income reduction

Sh*t could hit the fan even if you get to keep your job. For instance, you might experience a salary cut. Or, some of you might decide to reduce your working hours to focus on other aspects of life, like taking care of a baby, prioritizing higher education and even pursuing a brand-new venture.

Lessened income is also a very common experience for gig workers and freelancers, especially those who might have more than one variable income stream because of their work. In any of these situations, you might have to cover the gap by tapping into your emergency savings.

First things first, you should look for ways in which you can cut down your expenses, so your reduced budget can cover most essentials. Then, you can turn to your emergency fund for the rest of it.

Medical bills

At the same time, paying all your medical bills is yet another huge source of financial distress. Even if you do have health insurance, you are still prone to being on the hook for a co-pay and required to reach your deductible.

In this situation, it makes more sense to turn to your emergency fund and pay some of your bills. But you could reduce how much you take from your savings account at one time. How to do that? Well, check with your healthcare provider and see if you can set up a payment plan. It’s also worth trying to negotiate some of your medical bills.

First, you will have to request an itemized list of medical expenses, so you can efficiently understand what you’re being charged for and use that information in the negotiation. You can also contact the billing department to discuss payment options, clarification on some charges and even discounts or financial assistance.

Emergency repairs

If you need your car to get to work, you might also have to access your emergency funds and pay for a car repair. Besides, emergency home repairs like a broken refrigerator or even stove might require paying for professional help or even buying new appliances.

And yes, tapping into your emergency money to cover this type of cost might turn out to be a better option than using a credit card and building up all that debt. However, you should only use the emergency savings if the repair is needed for continuing everyday life.

In some instances, repairs can easily wait as you save up to cover them. The only thing you should be mindful of is that it’s not something that will worsen and become more expensive if you put it off for too long.

What you shouldn’t spend your emergency fund on

Pay attention to what you consider to be an emergency. Also, try to avoid using your savings or any other nonessential items and services, whether we’re talking about vacations or simply other entertainment expenses.

But here’s a great barometer: you should consider whether you actually need any of these things to survive. If not, just think twice before using emergency fund money for the purchase. If you use that emergency fund now, you might not have the desired access to the money later, especially when the money is scarce. Here are four examples of situations when you shouldn’t tap into your emergency fund:

• impulse purchases – even if traveling can be quite enriching, it still requires some advanced planning. Our advice is to save for travel expenses in a different stream from your emergency savings.
• vacations and travel – Even if travel can be quite enriching, it still requires some advanced planning. You can save for travel expenses separately from emergency savings.
• high-interest debt repayment – using your emergency fund to settle high-interest debts could still leave you vulnerable in all the emergencies that matter. Prioritize creating a debt repayment plan within your budget and try to explore options for refinancing or even negotiating lower interest rates.
• investments – Investing your emergency fund in some volatile assets could potentially jeopardize its accessibility when you need it the most. It’s also best to keep an emergency fund in a low-risk, liquid account, to make sure you have quick access and that the funds aren’t lost.

There’s much to know about this, so if you’re interested in conducting more research, we recommend you check this book.

If you found this article interesting, we also recommend reading: 10 Genius Ways to Save Money at Costco