When Disaster Strikes: How To Go About Tapping An Emergency Fund (2024)

By Rebecca Reisner

This story originally appeared on LearnVest.

Ah, the emergency fund.

That cushion of cash you’re so glad to have when your company announces it’s downsizing staff, or when your plumber tells you that the water stain on the ceiling is coming from a giant leak behind the walls.

These unexpected life “surprises” are the reason we at LearnVest advocate having one month of your take-home pay in a rainy day fund before tackling any other financial goals—including big ones like paying off a credit card.

Even better? Working your way up to six months of take-home pay—or nine months’ worth, if you’re self-employed.

But even if you’re hovering closer to the one-month-of-pay mark, consider yourself ahead of the pack: A 2015 Bankrate Money Pulsepollfound that only 38% of respondents had enough savings to be able to cover even a small disaster, like an E.R. visit or a car repair.

And once you’ve joined the ranks of those who’ve reached their emergency savings fund goal, you hope, of course, that everything remains peachy enough to leave that rainy day stash untouched.

But if a disaster actually does happen, how do you go about, well, touching it?

According to financial pros, it all depends on the cost of your mishap and the size of your emergency savings.

For added insight, we askedLearnVest Certified Financial Planner™ Matt Shapiro to assess three common hypothetical “I need to tap my emergency fund” scenarios and offer advice for how to draw down from a rainy day fund wisely.

RELATED:So What Really Counts as a Financial ‘Emergency’?

Scenario #1: The Sputtering Transmission

Nick, 25, earns $41,000 a year as a computer help desk technician. After two years on the job, he’s managed to build an emergency fund of $2,500, which is about a month of his take-home pay.

He wants to keep growing his cushion, but his 10-year-old coupe gets in the way. The car needs a rebuilt transmission—a $2,800 job that his mechanic says should buy the vehicle another few years.

Nick could pay for it by tapping his entire emergency fund and siphoning an additional $300 from his checking account—which would mean cutting back on some happy hours and takeout for the month.

But he has a good credit rating, which has kept the annual percentage rate (APR) on his credit card low, so he could also charge all or some of the $2,800, paying the balance off over several months.

What the CFP® Says:First and foremost, Nick should avoid using a credit card to finance the transmission repair.

“If it took him two years to save $2,500, it’s going to be hard for him to pay off a credit card balance of $2,800, with an APR of something like 10%—which will amount to a few hundred dollars in interest,” Shapiro says.

So Shapiro’s preference would be for Nick to tap his entire $2,500 emergency fund, and squeeze the $300 from his current budget—and then work on rebuilding the fund as soon as possible.

“I’d really like to see him cut back on flexible expenses, or work some overtime to build it more quickly [than over two years],” Shapiro says. “I’d suggest he aim for putting away at least 8% of his income.” That would work to replenish his emergency fund in about a year.

Another option? If his car may need more repairs in the future, Nick could consider buying a used car for about the same amount it would cost to fix his coupe now.

“If he can trade in his current car, and get a new one for $2,000 or so, that might be a solution,” Shapiro says. “Twenty-eight hundred dollars seems really expensive to fix an old transmission.”

RELATED:This or That: When Should You Buy Versus Lease a Car?

Scenario #2: The Fallen Oak

Meeting planners Andrea and Bruce, both 33, have a combined annual income of $120,000. They earn roughly the same amount, and are diligent about funneling $500 each month into their emergency fund.

As of today, they’ve managed to sock away six months’ worth of one of their paychecks, for a total of $19,500—a cushion that helps give them peace of mind.

Unfortunately, an accident involving a rotting tree on their property has them stressing out: Two huge branches fell onto their garage, collapsing the roof and damaging the structure. Since they neglected to take care of the sickly tree, their homeowners insurance won’t pay for the repairs.

And there’s more bad news: All of the general contractors they’ve contacted have said that, in addition to removing the branches, they’ll need to rebuild the garage—with the lowest estimate coming in at $18,000.

The couple’s emergency fund would cover the total, but they feel uneasy about nearly depleting their account.

That said, they believe that they can cut about $1,500 from their disposable income for a while to either put toward the contractor bill or rebuild their emergency fund—although they aren’t sure how long they can maintain that level of belt-tightening.

What the CFP® Says:Shapiro isn’t as quick to recommend that Andrea and Bruce sap their savings right off the bat, seeing as having a safety net is important to them.

In order to help them maintain at least some of their emergency cushion, Shapirosuggests that the couple consider applying for a home equity line of credit (HELOC).

While financing a repair normally wouldn’t be preferable, Shapiro believes that Andrea and Bruce’s diligence with saving would enable them to pay off any credit they use quickly. Plus, with interest rates low right now, he adds, the couple may qualify for a HELOC with an APR of less than 5%.

RELATED:Ask a CFP: ‘Should You Ever Take Out a Home Equity Line of Credit?’

To pay off the HELOC, Shapiro says, they could take their $2,000 a month—the $500 they’ve been putting into their emergency fund, plus the $1,500 they can squeeze from their budget—and put that toward the borrowed money.

In theory, this could help them pay off $20,000 in less than a year, leaving their emergency fund untouched.

But if freeing up $1,500 a month from their budget will be too difficult to maintain, another option could be to split the cost of the repair between the HELOC and their emergency fund.

For instance, they may find that cutting $700 a month feels more reasonable, and choose to use their savings to make up for the deficit.

However Andrea and Bruce choose to divvy up the repair bill, a key consideration, Shapiro says, is that they borrow only what they can pay off in one to two years—any longer than that and they’ll be paying too much in interest.

Scenario #3: The Pink Slip

Susan and Ben, both in their mid-forties, have built up an emergency fund equaling nine months of Ben’s take-home pay—or about $54,000.

As vice president at a menswear manufacturer, Ben makes $110,000, while Susan brings home $105,000 as a technology sales rep.

But a round of layoffs eliminates Ben’s job, and because of his short tenure at the company, his severance is minimal.

Before the job loss, the couple were using Ben’s salary to pay for such fixed costs as their mortgage and cars and their daughter’s private-school tuition. Susan’s paycheck went toward groceries, dining out, clothing, entertainment and other flexible expenses.

With their income reduced by more than half, they aren’t sure how to begin tapping their emergency fund. Should they see how long they can go without touching it? Or is better to start dipping into it now, with the hope that Ben will find a new job quickly?

What the CFP® Says:Because Ben’s job loss directly impacts their ability to pay for the essentials, tapping into the emergency fund right away to cover fixed expenses makes sense. It’s a “that’s what it’s for” situation, Shapiro says.

But Ben needs to take a look at his industry’s hiring landscape fast and assess the likelihood that he’ll snag another job that pays equally well. Positions at his pay level may be hard to come by quickly—and if that’s the case, belt tightening may be in order.

“After two or three months of being unemployed, it’s time to get realistic,” Shapiro says. “Often, the higher your salary, the longer it takes to get a new job. And people with their kind of money have probably been enjoying expensive dinners out.”

If Ben is staring down the barrel of a pay cut, it’s time for the couple to start rethinking their lifestyle. Perhaps they can cut some flexible expenses and redistribute those savings to fixed bills, or nix a few monthly services they no longer really need. Those moves could help their income—and their emergency fund—go further.

The good news is that having a hefty nine-month savings cushion means they aren’t in dire straits. “If they can cut just $1,000 from their monthly expenses, that fund could last them almost a year,” Shapiro says.

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. LearnVest, Inc., is wholly owned by NM Planning, LLC, a subsidiary of The Northwestern Mutual Life Insurance Company. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.

When Disaster Strikes: How To Go About Tapping An Emergency Fund (2024)

FAQs

Which is the best reason to tap into your emergency fund why? ›

For example, a bathroom remodel is a want but a major leak is a need. Medical expenses can be another gray area. Necessary, unexpected medical expenses, like a trip to the ER, is a good candidate for using your emergency fund. Elective healthcare such as plastic surgery, which may not be an emergency, probably isn't.

What is the answer to the question disaster preparedness? ›

Answer: Disaster preparedness means being ready for natural or man-made disasters. It involves having a plan, emergency supplies, and knowing what to do to stay safe when disasters like hurricanes, earthquakes, or floods occur.

What to do when a disaster strikes? ›

If you are evacuated:
  1. Follow directions of local officials. Carry your disaster supplies kit with you.
  2. Unplug appliances; turn off electricity, gas, and main water valve. ...
  3. If time permits, elevate or move furniture to upper floors.
  4. Tell someone outside of storm area where you are going.
  5. Lock home and leave.

What is the most common mistake made with emergency funds? ›

Stay on track and increase resilience by avoiding these five emergency savings mistakes.
  • Not Saving Enough. ...
  • Ignoring High-Interest Debt. ...
  • Taking Saving Too Far. ...
  • Investing Your Savings. ...
  • Dipping Into Your Emergency Fund. ...
  • Take No Gambles With Emergency Saving.
Oct 31, 2022

When to tap an emergency fund? ›

When should you use this money? The goal is to tap your emergency savings only for expenses directly related to an unexpected emergency. By setting a specific dollar amount that should be in that account, you will know how much to build up to.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

What are the five 5 disaster responses? ›

Prevention, mitigation, preparedness, response and recovery are the five steps of Emergency Management.

What are the 5 disaster responses? ›

The 5 Stages of the Disaster-Management Cycle
  • Prevention. The best way to address a disaster is by being proactive. ...
  • Mitigation. Mitigation aims to minimize the loss of human life that would result from a disaster. ...
  • Preparedness. ...
  • Response. ...
  • Recovery.

When a disaster strikes the first? ›

First responders are the first people to spring into action when a disaster hits. They include police officers, firefighters and emergency medical technicians.

What does Suze Orman say about emergency funds? ›

Emergency saving accounts

This is the starter block,” she says. “Obviously, we don't expect that you have eight to 12 months of an emergency fund. This is where you start to learn how to save.” Orman's hope is to “change the saving habits of everybody in this world.”

What is a realistic emergency fund amount? ›

People have different estimates about the best amount to save in an emergency fund, and the answer will depend on your income and spending habits. Generally, your emergency fund should have somewhere between 3 and 6 months of living expenses.

Is $1000 enough for emergency fund? ›

How Much Should I Save for My Emergency Fund? Let's talk about how much to save for an emergency fund. That answer depends on a few things. Starter emergency fund: If you have consumer debt, you need a starter emergency fund of $1,000.

Which of these is the best reason to tap into your emergency fund: pay your cell phone bill, buy books for college, pay $500 deductible after a car accident? ›

Which of these is a good reason to tap into your emergency fund --pay your cell phone bill, buy books for college, pay $500 deductible after a car accident? Why? $500 deductible after a car accident because it is an unplanned expense and would be a poor reason to need to borrow money on a credit card.

Which of these is the best reason to tap into your emergency fund ?: pay your cell phone bill? ›

An emergency fund is typically used for unexpected and necessary expenses that cannot be covered by regular income or savings. Paying a cell phone bill or purchasing college books are predictable and planned expenses, so they should ideally be covered by a regular budget and not an emergency fund.

What is the main reason for having an emergency fund quizlet? ›

The purpose of an emergency fund is to set money aside for unexpected financial emergencies and to provide a sense of financial security.

What is the best way to keep an emergency fund? ›

Use Low-Risk Accounts: Place your emergency fund in a savings account, or short-term certificate of deposit (CD). These options offer both liquidity and safety. Avoid Risky Investments: Keep your emergency fund away from risky assets like stocks or long-term investments.

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