Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

6 reasons to tap your emergency fund

Karen Wallace  |  10 Apr 2019Text size  Decrease  Increase  |  
Email to Friend

Question: When is it "OK" to tap my emergency fund?

Answer: First off, good for you for having an emergency fund!

For those unfamiliar with this concept, an emergency fund is enough cash to cover at least three to six months’ worth of expenses. If you are the sole income earner in your family, you have high fixed living costs, or you work in a field that is highly specialized, you may want to keep nine to 12 months' worth of cash at the ready.

It may not be necessary to include everything in your monthly budget when determining how much to set aside, but you should always include fixed costs like housing, utilities, and food; insurance and healthcare expenses; transportation; and minimum payments due on any outstanding debt (so you don’t rack up late payments).

Once you determine how much to set aside, make sure it’s sitting in some safe, liquid assets (preferably some that are yielding something; after all, interest rates have risen in the past few years).

But then what? Of course, the main reason you have this money set aside is in case you lose your job or are unable to work. But that’s not the only reason you might consider tapping this money. Life throws expensive curve balls every once in a while. Having a slug of cash on hand will keep you from having to use high-interest credit cards or to sell long-term investments, such as stocks and bonds, to take care of a problem that just can’t wait.

Think before you spend

Before you raid your emergency stash, ask yourself if the expense really constitutes an emergency. Specifically: Ask yourself how you would feel if you lost your job and didn’t have any income coming in after you had spent your emergency fund. Would you regret the expenditure and wish you had waited? If so, think before you spend.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Here are five more scenarios that may warrant spending emergency funds.

You (or a family member) needs emergency healthcare

Accidents and illnesses happen! Even if you have medical insurance, you may be surprised at how much you end up owing out of pocket. Unfortunately, medical bills are one of the major reasons people get into debt and file for bankruptcy.

But there are some things that are more elective in nature that deserve careful consideration. For instance, LASIK surgery is probably more of a nice-to-have than a reason to deplete your emergency fund. In a recent Reddit post on this topic, a commenter cautioned that using an emergency fund to fund optional purchases like LASIK could be a dangerous precedent, as you might feel inclined to do it again. I tend to agree.

Funerals

When someone who is very important to you dies, it can be expensive to drop everything and book a last-minute flight and hotel to attend their funeral. But if you can’t imagine not being there to honor your loved one’s memory, having an emergency fund can give you the ability to go and may save you from having to put a lot of expensive charges on your credit card.

Vet emergency

Although you can budget for your pets' anticipated needs like food, yearly vet checkups, and even neutering and spaying procedures, health issues also come up without warning. At some point, your pet will need a lab test, an X-ray, or even surgery. 

Car repair

When pricey car repairs come up, ask yourself how much you rely on your car and if you truly need to make the repair right now. If you live in an area with decent public transportation and school buses, you might not need to fix your car immediately. For others, having a working automobile is absolutely necessary.

Major appliance repair

This is another category that requires some judgment on your part. If your refrigerator is broken, you need to fix that immediately. Ditto for your heat in the winter. But depending on your lifestyle or where you live, not all major appliance repair constitutes an emergency. For instance, if your dishwasher breaks, you may be able to get by washing dishes by hand for a few weeks. Air conditioning may be a must-have for some, but a nice-to-have for others.

is a senior editor with morningstar.com.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend