When Is the Right Time to Dip Into Your Emergency Fund?

Optimism has long defined the American spirit, so why do many of us leave out the good stuff when we’re setting financial priorities? We create an emergency fund to cover things like broken water heaters or the loss of a job, but we forget to plan for life’s unexpected bonuses — a wedding in the family, or that once-in-a-lifetime deal on a tropical cruise.

Unfortunately, pulling out a little extra something to enjoy good fortune today could mean finding yourself hanging with no emergency fund later. Your emergency fund shouldn’t serve as a long-range savings account for special occasions. If you expect your rainy-day fund to protect you when there are real financial emergencies, you have to resist dipping into it for vacations, down payments, and other foreseeable non-emergencies. Don’t be tempted to combine your emergency fund with long-range savings for weddings, vacations, or the down payment on your next new car.

The trick to protecting your emergency fund from your own best intentions is to define what constitutes financial emergencies. True financial emergencies are unforeseeable, unavoidable, and time sensitive. As inconvenient as it is when your car reaches the point when replacing it may be smarter than repairing it, you always knew that day would inevitably come.

5 true financial emergencies

1. Job loss
2. Medical emergencies
3. Dental emergencies
4. Car repairs when you need your car to get to work or drive the kids to soccer practice
5. Home repairs for vital systems like running water or heat

5 financial non-emergencies

1. That sweet, sweet vacation
2. A down payment on your next car
3. Credit card debt
4. DIY “overdraft protection” — giving yourself a “loan” by transferring money from your emergency fund when you’re having a tight month
5. Gifts for special occasions

Steer clear of temptation

If you find yourself dipping into your emergency fund frequently for things on the non-emergency list, make it more difficult by keeping your emergency fund separate from your savings. Sure, you’ll lose a smidgen of interest and the convenience of keeping your money in one place, but you’ll dodge a heap of temptation.

Another way to keep yourself from stealing from your own rainy-day fund is to stop keeping your emergency fund in cash. Invest it in something like a short-term bond that earns at least 3% interest. You can always sell it if true emergencies do arise. If that sounds like a lot of trouble, well, it is — and that should help keep you from breaking into your stash when smart budgeting would be a better choice.

Speaking of budgeting, now’s a great time to review your budget to make sure it stands up over the long haul. A smart budget takes into consideration not only regular daily, weekly, and monthly expenses, but the entire curve of your financial year. If your budget barely helps you squeak through paycheck to paycheck without any consideration for annual events like holiday gifts or tax time, it’s time to readjust.

Finally, even if you’re short on money now, don’t put off saving until your finances feel more solid. Feeling less than stable is a signal that you need an emergency fund pronto. Set a savings goal you can live with today, even if it’s only $10 a week, $10 a paycheck, or even $10 a month. Don’t forget to give some thought to saving for the good things, too, so the next holiday season doesn’t find you dipping into your growing emergency fund to pay for presents.