What You Should Spend Your Emergency Fund on and When to Use It

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One of the most popular pieces of financial advice is to build an emergency fund.

It is a fund you only use in case of dire, unplanned events. They're the types of situations that would otherwise force you to go into credit card debt as a last resort.

What You Should Not Spend Your Emergency Fund On

One-time Costs

Many people are caught off-guard by major one-time costs like property tax bills, additional income tax owed, car registration renewal, and holiday gift budgets.

But, these aren't emergencies. You know you'll have to pay taxes once a year. You may not know exactly how much money you'll owe for taxes, but you know you'll have to pay something. You should budget a little bit of money each month for this bill, but it should exist separately from your emergency fund.

Occasional, Predictable Expenses

Some people use their emergency fund to pay for expenses that are predictable in nature, but not in time.

For example, you know you'll have to pay for major car repairs at some point. You don't know when this will happen. Your car may break down this year, or it might not break down for another three years.

But you do know that, at some point, you'll have to pay to fix your car. It is an expense that's predictable in nature, but not in timing.

This is also true for needing to replace your car completely. At some point in the future, your car will break down to the point at which it's no longer worth fixing. Instead of raiding your emergency fund to buy a new car, start making car payments to yourself right away.

The same is true for replacing your washing machine, water heater, air conditioner, dishwasher, and the leaking roof on your house. You don't know when your roof will spring a leak, and you can't predict when your refrigerator will break down. But you do know this will happen at some point in the future. The event is predictable. The timing is not.

Ideally, you should not use your emergency fund to pay for predictable and one-time expenses. You should set aside a little bit of money each month allowing you to pay for repairs and maintenance issues when they arise.

What You Should Spend Your Emergency Fund On

While you hope for the best, sometimes unfortunate events happen that you can't predict. Some examples are:

  • You and your spouse might both lose your jobs at the same time.
  • You may have a major medical catastrophe.
  • Your insurance may refuse to pay a large medical bill.

These types of events are truly unpredictable. It is what an emergency fund is meant to cover.

How You Should Form an Emergency Fund

Financial experts recommend building an emergency fund that covers at least three to six months of living expenses. They anticipate you will need to tap into this fund if you suffer a major job loss. You want the fund to be big enough to cover several months of bills while you look for a new job.

Reserve your emergency fund for these kinds of once-in-a-lifetime catastrophes. In the meantime, incorporate "saving for home repairs" or "saving for car repairs" when you make a budget. Never forget to budget for savings.