How to Use Your Emergency Fund and Make It Last

Tips for stretching your reserve cash during emergencies.

A couple looks over their finances together.
•••

Portra / Getty Images 

In times of financial uncertainty, having an emergency fund can help you stay afloat and give you much-needed peace of mind.

Because it’s a safety net, you should only use an emergency fund when you have true emergencies, like medical expenses, job loss, or divorce. Holiday shopping, a down payment for a new car, or new home appliances don’t qualify as emergencies. Instead, you should save for these expenses separately and leave your emergency savings for the times that you truly need it.

For prolonged emergencies, like financial hardship caused by the coronavirus pandemic, managing your emergency fund becomes important for ensuring you don’t exhaust your savings before the situation has improved.

Don’t Be Afraid to Use Your Emergency Fund for a True Emergency

"After diligently building your savings for months, years even, you may be hesitant to actually touch your savings," said Ramit Sethi, a New York Times bestselling personal-finance author.

“One reader told me she's still going to work and exposing herself (and others) to coronavirus,” Sethi said. “When I asked why, she admitted she has an emergency fund but she ‘is too worried about using it—that's for emergencies.'" 

This hesitation is warranted for frivolous purchases and non-essentials, but when it comes to using the money in a legitimate emergency, don’t hesitate.

“With your emergency fund, if you've got it and you need the funds, use it. Too many people feel guilty or scared about using their emergency fund, but a global pandemic (for example) is exactly what you saved for—an emergency,” Sethi said.

Understand Your Money Situation

When circumstances shake up your finances—for example, your boss cuts your hours or you lose your job—the first thing to do is take inventory of your emergency fund and any other liquid assets you have access to.

If you still have income from a side gig, unemployment insurance, or severance package, you may be able to simply use your emergency fund to supplement your other income. Otherwise, your emergency fund may have to cover your living expenses until you’re fully employed again.

If you lose all of your income, consider how much you’re spending each month to estimate how long your emergency fund will last. For instance, a $15,000 emergency fund will last five months if you spend $3,000 each month. Your monthly budget or recent checking account statements can give you some insight into a typical month’s spending.

After examining your situation, you may be hesitant to use your emergency fund because of the time and discipline it took to build it up. However, remember that your emergency fund is meant for hard times. It’s there so you don’t have to go into debt, which extends the impact of a big expense or income reduction.

Avoid expensive loan options like payday loans, cash advances, and overdraft fees. These typically have triple-digit (or higher) APRs and can be difficult to pay off, even after your income has returned to normal.

Transfer Emergency Fund Money Strategically

Your instinct may be to transfer your entire balance from savings to your primary checking account. However, doing so forfeits your chance to earn a return on the money via an online savings or money market account, says Malik S. Lee, a CFP and managing partner at Felton and Peel Wealth Management, Inc.

“One can maximize their yield in today's market by utilizing an online bank as they usually provide some of the highest yields inside of savings and money market accounts,” Lee said.

The top online savings accounts and money market accounts usually earn more than 1.50% APY. While the return can be nominal for smaller balances, earning some interest is better than earning none at all.

Prioritize Your Spending

Once you decide to dip into your emergency fund you’ll need to shift your financial priorities to make it last. You can’t be sure just how long you’ll have an income shortage, which means you can’t spend as though you have a steady paycheck coming in each month. For example, if you were aggressively paying off credit card debt, paying just the minimum lowers your overall monthly spending amount.

Create a Budget

While you’re relying on your emergency fund, create an emergency budget that focuses on covering your basic needs like housing and food first. Spending as little as possible when you’re experiencing financial hardship lowers the amount you need to pull from your emergency fund, allowing those limited funds to stretch further. That might even mean practicing more discipline with non-essential spending. For example, the average household spends about $288 a month eating out. Cutting this expense can free up the money you need to pay for essentials like utilities, gas, and groceries.

Seek financial assistance where it’s available before you fall behind on payments. Some lenders may offer hardship options—forbearance, deferred payments, or lower minimum payments—that give you some reprieve from your monthly obligation.

Adjust Spending Based on Your Cash Flow

If you’re still receiving a paycheck or you’re getting benefits like unemployment, make sure you adjust not just how much you spend, but when you spend. If you typically buy groceries on a Monday but your pay or benefits come through on a Wednesday, it may benefit you to buy groceries on Thursday to ensure you don’t overdraw your account.

What Comes Next?

Your crisis, no matter how large or small, won’t last forever. As your income returns to normal, you can start focusing on the long-term again and begin replenishing your emergency fund. Continuing your scaled-back spending habits, at least for a few months, will leave some room in your budget to regularly contribute to savings. Also, consider earmarking your next tax refund for your emergency savings.

Once you get back on your feet, you may need to add a side gig to replenish your emergency fund. Lee recommended adding a temporary part-time job like Uber, or renting out a room via Airbnb, to bring your emergency fund back to where it needs to be.

Article Sources

  1. Consumer Financial Protection Bureau. "An Essential Guide to Building an Emergency Fund." Accessed May 21, 2020.

  2. Bureau of Labor Statistics. "Consumer Expenditures--2018." Accessed May 21, 2020.

  3. Consumer Financial Protection Bureau. "Protect Yourself Financially From the Impact of the Coronavirus." Accessed May 21, 2020.

  4. Consumer Financial Protection Bureau. "How to Use Your Tax Refund to Build Your Emergency Funds." Accessed May 21, 2020.