An emergency fund is a savings account (or any personal fund you set aside) that gives you easy access to cash. You turn to an emergency fund when you find yourself with unexpected expenses for something that needs immediate attention. But, sometimes, it’s difficult to judge whether an unexpected expense is immediate and essential – or if it’s just our behavioral tendency for immediate relief.
When we run into a cash flow problem, it’s easy to label that moment as an “emergency.”
You don’t have enough money to purchase a new rain jacket. Emergency. You could wash more loads of laundry in less time if you replaced your washer. Emergency. Your kid’s laptop needs replacing. Emergency. A family member needs money back home. Emergency. But which of these is an actual emergency? That’ll depend on one person to the next, as any of these could qualify as a true emergency depending on their unique life situation.
To get a better idea of how best to use your emergency savings, we look at examples of unexpected expenses and also look at alternative ways to pay for seemingly sudden expenses.
When to use your emergency fund: examples
Ultimately, the purpose of an emergency fund is to prevent someone from taking on high-interest debt like credit cards, payday loans, or other unsecured loans that push them into financial ruin. Having emergency savings is meant to help you cover expenses that are unexpected, urgent, and essential. Often, what’s considered “unexpected, urgent, and essential” are any non-discretionary expenses (housing, taxes, debt, and groceries) connected to your and your family’s survival.
“Pulling from an emergency fund should never be done lightly, as it isn’t intended to cover long-term expenses or everyday spending habits,” said Ann Martin of CreditDonkey, a review and comparison website aimed at helping consumers navigate their financial decisions. “But with careful consideration, these funds can provide peace of mind in times of uncertainty and need.”
Examples of unexpected expenses on which to use your emergency fund include:
If you lose your job, you can use your emergency funds to cover your essential expenses until you find a new job, until you receive unemployment benefits, or until you can find an additional income stream to fill in the gaps.
What counts as job loss: Literally losing your job – whether involuntarily (you’re fired or laid off) or voluntarily (leaving on your own for whatever reason). It can also include any reduction in your income. This can take on the form of a salary cut or a reduction in your hourly shifts. If you’re a freelancer or consultant, job loss can also mean losing a significant client that may have contributed a large portion of your incoming cash flow. If you work more than one full-time job or if you work a part-time job on top of your full-time job to cover non-discretionary expenses, then job loss could also mean losing that additional employment.
What probably doesn’t count as job loss: Losing a side gig from which your earnings have no bearing on your non-discretionary expenses; losing that additional work doesn’t impact your ability to cover your essential expenses. The money you earn from a side gig is likely additional discretionary income to spend on non-essential items. Your emergency fund is not meant to make up for the loss in discretionary funds.
Out-of-pocket surprise medical bills are common unexpected expenses and are a top source of debt for many Americans. If you or a family member has a medical emergency, your emergency savings can help cover the costs of medical treatment and related expenses.
What counts as a medical emergency: For example, if you or someone in your family suddenly needs immediate medical attention or treatment that isn’t fully covered by your health insurance, then you may need to dip into your emergency fund. This can look like a final hospital bill (after health insurance cost deductions) from an unexpected trip to the emergency room. If you do find yourself in this position, check your bill to make sure you were charged correctly and seek relief from medical financial counselors for help if needed.
What probably doesn’t count as a medical emergency: Any medical procedure or treatment that doesn’t immediately impact your survival. For example, most cosmetic procedures likely don’t count as medical emergencies. Or something like getting a new pair of glasses usually won’t count as an unexpected expense (unless your eyesight suddenly gets worse overnight, in which case new glasses may be necessary for you to continue functioning in your everyday life).
If your car breaks down and you need to make costly repairs, you can use your emergency savings to cover the cost.
What counts as an emergency car repair: Again, here, consider whether the repair impacts your everyday survival. The starter in your car is broken and your car won’t start, or you might need to replace a flat tire. Either situation can potentially impact your ability to survive – you might risk losing access to transportation to your job. These are examples of warranted unexpected expenses on which to use your emergency savings.
What probably doesn’t count as emergency car repair: Anything that doesn’t impact the primary functions of operating a vehicle might not be considered emergency car repair. Is the cruise control broken in your car? Cruise control is an added convenience rather than a necessity, so it’s not in your best interest to use your emergency fund to get it fixed.
If you need to make unexpected repairs to your home, such as fixing a leaking roof or broken water heater, you can use your emergency funds to cover the cost. In some instances – such as in cases of natural disasters that may cause your home to be unlivable due to burning down or flooding, then your emergency savings may be used to cover temporary alternative housing (e.g., hotel fees).
What counts as an emergency home repair: Differentiate between necessity and convenience when it comes to considering a home repair. A toilet that overflows might impact the integrity of your entire home’s plumbing, or your water heater breaks during the winter. Both scenarios of home repair likely count as necessary unexpected expenses.
What probably doesn’t count as an emergency home repair: Anything that doesn’t immediately affect the safety and health of you and your family. For example, installing new windows with a higher insulation rating may be overall better in moderating the temperature inside your home, but your current windows likely already do a sufficient job keeping you and your family protected from the outside elements.
What an emergency fund should not be used for
It can be tempting to dip into your emergency savings when faced with financial hardship, but there are certain things that should never be paid for with an emergency fund.
According to Daniel Cieniewicz, a financial planner, “an emergency fund shouldn’t be used for something that could be planned for and otherwise budgeted.” These kinds of expenses are bucketed into four basic categories:
Cieniewicz said that one good example of discretionary spending that doesn’t necessitate spending from emergency savings is a vacation. “In the event that an individual or family wanted to plan for a vacation, a ‘vacation fund’ should be established,” he said.
Spending towards a vacation counts as leisure spending and should be funded using discretionary funds that you’ve saved outside of your emergency fund. You can set up a separate savings account, or create a new “goal” or “bucket” in your existing account to track these funds separately.
Luxury and entertainment
A lot of our discretionary spending can be categorized under luxury and entertainment. This can include anything from upgrades to our wardrobes or technology (e.g., the newest iPhone or StockX sneakers) to the gifts that we purchase for other people.
It’s also hard for anyone to argue that going out to the movies or watching a new play count as unexpected expenses – both are examples of leisure spending and don’t warrant funds from your emergency savings. Budget for these experiences separately and don’t pinch your emergency fund.
Generally, you should avoid using emergency funds towards paying off existing debts. Many debts require longer-term planning and payments, and there are several kinds of debt (like mortgages) that are typically considered “good debt”.
A big caveat, here, are debt payments that put you at risk of defaulting or any kind of debt that can prevent you from saving money for your emergency fund in the first place. For example, if you need to make an upcoming minimum monthly payment on a car loan and you also just happened to lose a source of income, then making that car loan payment could count as an unexpected expense for which you can use your emergency savings.
This same principle may also apply to any high-interest debt: if paying off that debt sooner can help you save more money in your savings, then using emergency funds on an upcoming payment could be considered an emergency.
For some Americans, debt is accrued due to potentially unfair circumstances. Consult trusted non-profits like GreenPath or agencies like the Consumer Financial Protection Bureau if you feel you may have been a victim of usury.
Your emergency fund should be reserved specifically for unexpected expenses. Routine expenses – bills that you pay on a regular, recurring basis (whether that’s a small weekly subscription expense or an annual payment like your income tax) – are meant to be planned along with your non-discretionary expenses.
Anticipated expenses can also include things that you know you’ll have to purchase a little further down the road. “An example [of anticipated expenses] is something that can be planned ahead but that you may not necessarily have a timeline on but will need repair or replacement,” said Cieniewicz. “If, say, you realize you need to replace your tires every 50,000 miles, that’s something that can be planned for,” rather than something that requires your emergency fund.
It’s important to clarify that Cieniewicz brings up the tire example as a case for maintenance and upkeep of good car health rather than an emergency car expense or replacement (like in the case of a sudden flat tire).
For all these cases where your emergency fund should remain untouched, saving is key to covering all the other expenses in your life: plan and budget other savings to make sure you can pay for those expenses. Saving is a habit that builds the financial confidence and resilience that you deserve.
What are alternative ways to pay for unexpected expenses
While an emergency fund is a great way to handle unexpected expenses, there may be alternative ways to pay for them if you don’t have emergency savings, if your expenses exceed the amount of money in your fund, or if an unexpected expense doesn’t necessarily qualify as an emergency.
Here are some alternative ways to pay for unexpected expenses:
Negotiate your bills
If you face an unexpected expense, you may be able to negotiate with your creditor or with the organization to which you owe money to set up a payment plan or to temporarily reduce or defer payments.
For example, if you’re faced with an emergency medical bill, try to negotiate a payment plan with the provider. Many providers have financial assistance programs that can help you pay your bills over time.
This option gives you the opportunity to minimize the impact on your emergency savings by decreasing the immediate payments toward an unexpected bill.
Get help from friends and family
If you have a trusted family member or friend who can lend you money, this might be an option to help you pay for a sudden expense. Have a frank conversation with that person and clearly communicate your situation and establish the terms for repayment.
Borrowing money from someone else also could result in an unexpected expense on that person’s behalf. It may be in your best interest to lay out an approximate timeline for paying them back. While most friends and family likely won’t add interest fees to a personal loan they provide you, there’s the potential backlash to your social currency (i.e., not paying back loans from friends and family could impact your personal relationships with them).
Pick up a part-time job or side gig
Consider taking on work in the gig economy, or taking on a part-time or contract job, to earn extra money to pay for unexpected expenses.
Additional income from side gigs, such as driving for a ride-sharing service or doing odd jobs for people in your community, can help you earn extra income to cover any sudden expenses that pop up in your life.
One relatively quick way to earn money to spend on unexpected expenses: sell any items you no longer need or use. Look around – is there anything you own that is no longer useful to you? This can include anything from clothing and jewelry to household items (like furniture) and electronics.
Local digital marketplaces, such as Craigslist or Facebook Marketplace, are great places to list items for sale.
Apply for unemployment benefits
If you’re fired or laid off from your job, then apply for unemployment benefits. Each state has its own set of requirements and regulations, so it’s important to do your research to make sure you qualify for unemployment benefits in your state.
Apply for unemployment benefits as early as possible, as these benefits can often take several weeks to process. Often, they also require weekly check-ins as well as certain actions you need to perform (e.g., submitting a record of jobs to which you’ve applied in any given week) to keep receiving benefits. Benefits payments can help reduce your reliance on the funds in your emergency savings.
Look into government or community resources
“Your community is often a great place to turn in times of need,” said Doug Carey, the founder of the retirement planning software platform WealthTrace. “Many cities and towns have a food bank to help you reduce the need to tap into your emergency fund to buy groceries. Additionally, there might be emergency utility and housing assistance in your community. Reach out to local agencies and nonprofits to see if you qualify.”
In Washington, DC, for example, there are several organizations that provide utility assistance programs to help residents cover the costs of gas, water and electricity. Depending on your state or local government, these kinds of assistance programs may require specific income requirements.
If there’s any kind of unexpected expense that you struggle with, it’s worth doing a quick internet search to see if there’s a government or charity resource that can help you make ends meet. If you do not have access to the internet on a regular basis, visit your local library or call 311 for assistance.
“For example, if this is a health-related expense you might qualify for public health benefits,” said Carey. “If the expense involves an emergency room at a hospital you might be able to get the hospital to cover the expense under a charity care program. This might not be the quick cash you need, but it would not carry the burden of debt payments or needing to pay back family or friends.”
Pay with a credit card or funds from a personal loan
A lot of last-minute expenses can be covered by expensing it to a credit card – especially if you don’t already have an emergency fund. For some people, a personal loan from a bank or online lender can also offer some relatively quick access to cash for unexpected expenses. Both examples, however, have the potential to come with high-interest rates that you’ll need to pay.
When faced with unexpected expenses, we recommend this route as the last option to consider.
How to maintain savings in your emergency fund
Rebuilding an emergency fund is an essential step that you need to take in cases when you do end up using emergency savings to pay for unexpected expenses. To rebuild (and maintain) the savings in your emergency fund, it’s important to have a plan in place and to build habits that can ensure your long-term financial stability and preparedness.
Here are some steps you can take to rebuild your emergency fund:
Assess your current financial situation. Review your budget and look at your income, expenses, and debts. Identify areas where you can cut back on expenses and increase your income. Make sure to prioritize your emergency fund contributions in your budget. Keep in mind that you may need to make some temporary lifestyle changes to free up extra cash to rebuild your emergency savings.
Establish a savings goal (or several goals). Set a specific goal to work towards. Determine how much you need to save to rebuild your emergency fund, and then lay out a plan that outlines small, achievable goals to help you stay motivated.
Automate your savings. Save directly from your paycheck like with Sunny Day Fund, or set up automatic, recurring transfers from your checking account to your emergency fund – have it set to happen once or twice a month (whatever you feel comfortable with). This helps you stay consistent and makes saving easier.
Stick to your budget and savings plan. When it comes to maintaining emergency savings, sticking to your budget is key. Avoid using your emergency savings for non-emergencies and continue to contribute to it regularly.
Remember that rebuilding your emergency fund takes time. Learn to celebrate small victories along the way and remember that the peace of mind that comes with having a fully-funded emergency fund is worth the effort.